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expense ratios

If this has been discussed at length already, please forgive me (and someone share the link!) but I wanted to ask you all how much you're willing to pay in expense ratios? Ed's commentary this week made me think of this again.

The conventional wisdom is, the cheaper the better, but with a few funds you really do seem to get your money's worth. According to M*, PDI charges a 2.17% fee after excluding interest expenses. With interest expenses (for leverage), the fee is 3.15%. The advisor fee is 2.10%. Yet it's been a remarkable performer and has outperformed PIMIX, by the same manager, which only charges 0.45%. And that manager, Ivascyn, has been putting his own money into PDI. Of course he, like most of us, could be overestimating his ability to add value, and we'll have to see if PDI holds up as well as PIMIX next downturn.

My most expensive funds are HUSIX, small value, 1.85%, and GPIOX, foreign small cap, 1.73%. I'm a little uneasy about both, especially HUSIX, since there are good and somewhat cheaper SV funds out there. HUSIX and GPIOX have both earned their money so far, but wow, what a high hurdle they have to overcome.

My thoughts are that with high ERs, you're betting you've got a genius on your hands (and not someone who just got lucky for a few years), while with cheap ERs, a team that's merely very good can earn their fees. Since genius is tough to spot, logicially I should have all my money with D&C and Primecap, but I don't. (Though a Primecap fund is my single largest holding.)

Yet Ed's commentary this month made me think about the other side of the coin: if the fees are too low, talent will flee, and a mediocre fund won't even earn back its modest ER.

What are your thoughts? How much are you willing to pay? What are your highest conviction high cost funds?

Comments

  • Unless there are special circumstances, I don't consider funds whose expense ratios are over the category average. New funds whose management fees suggest that their expense ratios will come down to acceptable levels in time are okay. Grandeur Peak has demonstrated that they'll close their funds at extraordinarily low levels and that qualifies as a special circumstance in my eyes. Something like Tweedy, Browne, which is close to the category averages and has unusually low turnover (likely meaning low transaction costs) also is acceptable to me. But generally I'd prefer funds with lower than average costs and turnover.

    Other than those, I think AZMIX at 1.30% is my highest cost fund. It's emerging markets so that's not out of line.
  • edited September 2014
    The user and all related content has been deleted.
  • If it makes you feel any better, the management fee is "only" 1.15% (see M*'s note on the fund's expense page).

    That's 1.15% of all assets under management, including the borrowed money (leverage). Since the borrowed money (amount of leverage) is 44.24% of the total assets of the fund, the expenses as a percentage of the amount that investors put in (as opposed to being borrowed) are nearly double the stated 1.15%. I come up with 2.06% vs. M*'s 2.17%, which is based on the older leverage figure found in the annual report - 47.20%.

    Viewed this way, the total cost of borrowing adds about 2% to the ER: 0.98% direct cost of borrowing money and about 1% to manage the borrowed money. (Personally, this doesn't make me any more comfortable, but at least the management fee is not some totally outrageous percentage of AUM.)

    BTW, have you read the prospectus (well, offering)?
  • My most expensive fund, which I know several other people here hold, is WAFMX at 2.25%. Ed's commentary made me think a lot as well, and it seems to me that you either have to believe you're getting something valuable for the expense ratio or you shouldn't invest in the fund. In this case I chose the fund because it gives me access to markets that I believe will provide above average returns in the long run and I wanted exposure to the growing middle class in those markets rather than the big financial institutions that some other frontier markets funds offer.

    In the case of each fund I own, a bit more than 20 of them, I consider the expense ratio as one aspect of whether I want to trust them with my money. In the case of Primecap, I love that the expense ratio is low, and I think they far more than earn it. In the case of Grandeur Peak, I don't like that the expense ratio is as high as it is, but I feel like their approach, their shareholder friendliness and the fact that the managers as a group have a lot of money invested in each of their funds gives me confidence that the expense ratio will be worth it.
  • Thanks for your thoughts, everyone.

    @msf, I guess that makes sense about PDI, but I'm not sure it makes me feel better -- it gives the manager an extra motive to lever up, though he's got a ton his own money in the fund that I presume he believes what he's doing. Is that common for CEF expenses?

    I haven't read the prospectus/offering, I'm not planning to invest in it unless there's a major dip (I like my bond funds boring), though I sure regret not having bought it a year ago. Anything striking in the prospectus?
  • edited September 2014
    GABSX and WEMMX are 1.4%+/-, but have beaten (not by a lot) FLPSX over the decades, also PENNX. Did not seek out other hottest sc funds to compare. Everyone rags on Gabelli, don't know that he is a genius exactly, but he is an extremely able and consistently superior active manager for sure.

    I have a lot, for me, in PDI too.

    Bottom line for me is that I really do not much care about ERs given performance, but I do try to watch it all closely, sure, and my average is below-average.
  • expatsp said:

    Thanks for your thoughts, everyone.

    @msf, I guess that makes sense about PDI, but I'm not sure it makes me feel better -- it gives the manager an extra motive to lever up, though he's got a ton his own money in the fund that I presume he believes what he's doing. Is that common for CEF expenses?

    I haven't read the prospectus/offering, I'm not planning to invest in it unless there's a major dip (I like my bond funds boring), though I sure regret not having bought it a year ago. Anything striking in the prospectus?

    Sorry, I don't generally pay too much attention to closed end funds - haven't found a use for stock funds, and most bond funds are leveraged. (There's additional risk with leveraged funds, especially in a rising interest rate environment, and while I don't necessarily like my bond funds too boring, that's one factor I prefer to take out of the equation.)

    I only dug up the offering for a clearer description of the expenses. So I haven't looked through the rest of the doc. If I were considering an investment, I'd be reading through it to understand all the types of securities it might buy, how it treats currency, how it compares in strategy, flexibility, and risks with PIMIX. I'd be especially focused on how it manages risk, given its high leverage and short lifetime.

    With respect to ERs I generally try (but don't always succeed) to keep domestic stock funds under 1%, bonds under 0.5%, with a little more play (10 basis points or so) for international stock, small caps. Like others, I'd consider special funds that slightly exceed these parameters, such as the aforementioned LSBDX (0.63%), and TGBAX (0.61% - I wouldn't pay up for TPINX even load-waived).

  • FTW: You may wish to pose your PDI ER question on the CEF M* forum. And while you're there, look at the MPM (modern portfolio management) thread begun yesterday to see what PDI has added to TR from its tools. PDI is a favorite of a number of posters there. Best!
  • edited September 2014
    No magic number IMHO (Sacrilege:-). And no desire to quarrel with the indexers.

    Actually, M* calculates your average ER when you use their X-ray feature. My last one was around .80% which I'm comfortable with. Probably lower than most due to having little in international equity funds and shying away from the goanywheres.
  • Good point @hank. I found that M* feature to be beneficial since I have a couple of funds with higher ERs but the rest made the average better than usual.
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