Mutual fund expense

shipwreckedandalone

I am always intrigued that mutual fund operating expenses and 12b-1 fees that are above average are used by investors as a disqualifier towards purchasing a mutual fund when the total return reflects those fees (net of expenses). When it comes to fees, I use the total return as a criterion (among many others) for selection unless you believe transactional costs are excessive. I personally am willing to pay more for outperformance and quality. This is not intended for a no load vs load or early redemption or portfolio turnover discussion etc etc.

Ted

@shipwreckedandalone: The only thing you can control when you buy a fund is the cost.
Regards,
Ted

slick

@shipwreckedandalone: I agree. Some like international, small cap, sector funds I expect to pay up, even on etfs. For instance, I have a couple of Guggenheim etfs that are more than the average cost, but they also return higher than average for the ones I have.

DaveSch

In a way, fund expenses present an additional risk. Will the higher expense fund provide returns that exceed the additional cost? This is what I ask myself when evaluating a change in my fund investments. Myself, I like a combination of active and passive managed funds and etf's.

00BY

In past returns, er does not matter, but in the future returns expenses matter a lot.

High expenses are a head wind to achieving above average returns.

Morningstar studies conclude that er is the best predictor of future returns. Some dispute that, but all admit that with a higher er, you have a higher hill to climb.

shipwreckedandalone

So if Stanley Drukenmiller (compounded returns of 30%/yr and never a losing year 1986-2009 while at Duquesne) had managed a mutual fund, I should have not consider him worthy of investment because his expense ration is 1% (fictitious) higher than norm?

MikeM

...fund expenses present an additional risk.

Well said @DaveSch . I'm sure the number of funds that do better than their index varies with investment type, so it probably is a very small percentage that beat the index for most domestic large caps, mid caps and possibly even small caps. So the percentages are low to begin with that you have a consistent winner. Even lower for high priced funds to stay consistent in my mind. That is added risk. And add to that those who like to own multiple large caps for example, you probably don't have a snowballs chance in Hawaii of beating the index when you average them all together.

So, like others have stated, you surely have to consider the fund's investments to decide if it's worth paying higher expense ratios. Balanced, tactical, global, international, Em's may be worth paying a little more for a good manager - to a point. But at some level, even those funds will be hindered by expenses. Domestic large cap... I certainly wouldn't pay more than a 1% expense ratio, no matter what "past" records say.

bee

M* study reveals that, in every case, low cost funds and or high star funds beat high cost / low star funds:

Article:
news.morningstar.com/articlenet/article.aspx?id=347327

Rolling 5 year Results:
How Expenses and Stars Predict Success

It appears if you are going to pay a higher expense ratio then at least confirm the fund is a high star rated fund except in the case of high star rated funds that fall from grace unexpectedly (SEQUX).

00BY

There will always be one example of a higher er fund that out performed in a time period. But that one fund will change depending on time period. most higher er funds will under perform sothe challenge is to identify them in advance and rotate them ...