FYI: Authors Kurt Vonnegut and Joseph Heller were chatting at a party on Shelter Island. Their host was a billionaire hedge fund manager. At one point, Vonnegut says to Heller, “You know, this billionaire makes more money in one day than you made in your whole lifetime from your novel Catch-22.”
Heller responds, “Yes, but I have something he will never have…enough.”
Catch-22 wasn’t just read by a few of Heller’s sympathetic friends. It has sold more than 10 million copies.
Regards,
Ted
http://assetbuilder.com/andrew_hallam/why_even_vanguards_mutual_funds_cost_more_than_you_might_think
Comments
I don't know about 2004, but in 2015, the average ER of the 25 largest active funds (using the share class that M* picks with "distinct portfolio") is 0.66%, about 13% lower than it was in 1945.
"No active fund is as cheap as it appears [because of trading costs]." Misleading in a couple of ways, the main one being that index funds also have trading costs (for the most part, it's turnover, not index vs. active, that matters). The minor issue is that there is a fund that never changes its portfolio, and it's not an index fund. Most of the people here don't need to be reminded of it - LEXCX.
If one talks about bond funds, even index funds, they're going to have a lot of trades, because they're constantly replacing bonds that mature (or come too close to maturity to keep in the portfolio). Looking at the pure equity funds in the largest 25 active, one sees turnover ratios ranging from 11-12% (D&C Int'l DODFX and Harbor Int'l HAINX) all the way up to 45% (Fidelity Contra FCNTX); no other fund is above 0.39%. These are all way below the "average" fund's 72% turnover.
Then there is a trading cost particular to index funds - front running (related to reconstitution). No mention of it in this article. And what about index funds that are not market (or at least free float) weighted? They have higher turnover by design. See, e.g.
http://www.investingdaily.com/11263/equal-weighted-index-etfs-pros-and-cons/
None of this is to suggest that index fund "hidden" costs are higher than active fund costs. Just that it would be nice to read articles that didn't start from a conclusion and apply data selectively to reach that conclusion.
For completeness, the bond/hybrid funds in the largest 25 funds are:
ABALX, CAIBX, AMECX, MBLOX, SGENX, FKINX, MWTRX, PTTRX, TPINX, VFSTX, VWELX
The equity funds in the largest 25 funds are:
AMCPX, CWGIX, AEPGX, ANCFX, AGTHX, AIVSX, ANWPX, AWSHX (all American Funds!), and DODFX, DODGX, FCNTX, HAINX, VGHCX, VWNFX
be concerned with Performance! 10 yr. returns would be a good place to start
10 yr. return of class-C (level load) OSMCX blows its competition away (#1 over ten years by more than 1%/year).
On a serious note, if one would consider owning the Great Owl Fund WAIOX (now closed), that was the second best performing fund in the category over the past decade, then why exclude the better performing and cheaper (including embedded load) Oppenheimer fund OSCMX simply because it has a load?
Though now one can purchase the much cheaper A share class OSMAX load-waived, which offers even better performance (how could it not - same fund at lower cost) at a low (for the category) ER.
I am in the process (will do over a 2 year time span) of transferring my taxable account in VWIAX (Vanguard Wellesley) to James Balanced Golden Rainbow (GLRBX) for various reasons, even though it has a 1.01% ER vs. Vanguard's .18%.
The ten-year return for both funds is essentially the same, but James has a much better tax efficiency so its after-tax return handily beats VWIAX.
My accounts are at Schwab, so to buy any Vanguard fund (including additional shares) costs me a $76 fee. Not a huge deal, but it does dampen the idea of adding a thousand or two dollars on a whim. There is no fee for buying or adding to James.
Although James has a beta of .81 vs. .54 for VWIAX, it only dropped (roughly) 5% in 2008 vs. VWIAX's 10% loss. Of course, that doesn't mean it will also happen like that in the next bear.
FWIW: Aside from other mutual funds I do have two stock and one REIT ETFs, so I am not opposed to them when they suit my purpose.
Regards,
Ted
http://www.marketwatch.com/tools/mutual-fund/compare?Tickers=GLRBX+VWINX&Compare=Returns
I am in the process (will do over a 2 year time span) of transferring my taxable account in VWIAX (Vanguard Wellesley) to James Balanced Golden Rainbow (GLRBX) for various reasons, even though it has a 1.01% ER vs. Vanguard's .18%.
Leroy,
Because, as the sun rises from the east, the ER is just about the only metric you can be certain will be the same the next day. And, 83 basis points does not come for free. It's a significant drag, that if overcome, will be through increased risk.
Mona
VWIAX: 7.40%
GLRBX: 7.42% (Ted's link above shows GLRBX as being even a bit farther ahead)
Call it a wash.
However, the (M*) after-tax 10-year returns are:
VWIAX: 5.84%
GLRBX: 6.56%
That, along with GLRBX's better bear performance, and the ability to buy more shares with no fee, leaned me in its direction. Will it be the better choice in ten year's time? Who knows, and who knows if I'll even be alive then.
I tried my best to get you to understand the "obsession" with low expenses.
Mona
Anybody?
The "big deal with it" is the 3, 5, 10 and 15 year Standard Deviation.
Regarding the the tax cost ratio as being "big drag on performance", I hold VWIAX in a non-taxable account, so there is no tax drag.
As I said, "the ER is just about the only metric you can be certain will be the same the next day. And, 83 basis points does not come for free. It's a significant drag, that if overcome, will be through increased risk"
Mona
As the ad says " you can pay me now or you can pay me later ! "
Derf
Did you note my other reasons for switching?
P.S.: I am -- and was -- well aware of their slightly different allocations.
That VWIAX has performed as well is a testament to the 83 basis point ER advantage it enjoys. You can see this by looking at the average 10 year performance for moderate allocation funds (typically 60/40) and conservative allocation funds (typically 40/60). The former returned an average 6.41%, the latter 5.15%.
So an allocation fund with 10% less in stocks than GLRBX might have been expected to underperform by about 0.63% (half the difference between the two averages). But VWIAX performed about the same, despite this allocation headwind. The 0.83% ER advantage pretty much explains this.
VWIAX has 10% more in bonds than does GLRBX. Of course it's expected to be less tax efficient. But it's also going to be less volatile.
Its 10 year standard deviation (you're looking back to 2008) is 6.13, while GLRBX's is 6.93. That's likely part of why M* rates the former as below average risk, while it rates the latter as average to above average, depending on time frame.
Losing money in the 2008-09 bear market: For both funds, their worst quarter was the first quarter of 2009. GLRBX lost 7.09% (from its 2010 prospectus). VWIAX did better, losing less than 6.69% (that's how much the Investor class shares lost, per 2010 prospectus).
If you want an orange (50/50 allocation) instead of a tangerine (40/60 allocation) you might try equal parts of Wellesley and Wellington. Just a thought, I haven't crunched the numbers.
Thanks for your post and hopefully Leroy has read it.
On a different note, I happen to think Wellesley and Wellington is an excellent combination if a 50/50 allocation is desired.
Mona
Some additional info that maybe I should have included, but didn't think was necessary:
VWIAX/GLRBX is only 20% of my portfolio -- the other 80% is tax-deferred.
The allocation mix of either fund is irrelevant to me. I had pondered putting the whole account into a total U.S. stock index but decided against it because I don't want the volatility. I'll be retiring in a year or two.
Whatever I did with my taxable portion, I would adjust my non-taxable 80% to give me the overall asset allocation I want. I was looking for a tax-efficient balanced fund and there aren't a whole lot of decent ones.
All things considered (which I outlined in my OP), James Balanced came out on top, for a balanced fund in a taxable account. Being only 20% of my portfolio, I consider switching from VWIAX to the slightly differently-allocated GLRBX a sideways move (aside from that, the allocations in either fund can change within the guidelines; they could even reverse positions in the future).
Had I gone with a total stock fund in the taxable 20%, I would have increased my bond holdings in the tax-deferred portion to give me the AA I want.
"I've never quite gotten the obsession with low expenses"
I attempted to address this.
Sorry I failed.
Mona
They have some top performers like Golden Rainbow. But, in keeping with the flying motif tonight, they also flew their market neutral fund (JAMNX) into the ground a decade ago. Crashed and burned. Now they've come out with a new version of that prior disaster, a long-short fund (JAZZX). Like its predecessor, it's off to a hot start and money is flowing in. But keep your seat-belt buckled. And with a 2.6% ER, we all know who the real winner is on that one.
Yes, the Balanced fund has done very well. M* likes it. But, you're not buying the performance of the past 10-15 years. You're buying the performance of the NEXT 10-15 years. Big difference. Do as you will. And you will. Were it me, I'd stick with a larger company with a deeper management team, better research capabilities and more competitive fees. There's so many I won't start to name them. Or, as I think Mona and others would suggest, go with an index fund or other offering from low cost leader Vanguard.
Just a thought - The Lipper Scorecard (at Marketwatch) does a great job rating tax efficiency of funds. If you haven't already, try to locate a better alternative using that resource.
Regards
Mona
My last post was pretty long. So I'll add just a bit on why I was so focused on management team
and research capability.
Picking good stocks is one thing. Picking good junk bonds is another. Understanding AAA rated debt instruments, especially the "duration" component, is still another. And achieving the right "balance" among these components in a dynamic global environment (this is a balanced fund) requires yet another level of understanding. Some successful balanced funds even dabble in real estate, foreign currencies and/or commodities which can hedge against the equity and bond positions. Not the type of analysis I'd trust to one, or even a small handful, of managers.
Owing to the complexities involved in this type of fund, I'd go with the best house I could find. Just as GLRBX has turned out stellar numbers over the past decade, IMHO, it could just as easily go the other way. Houses subject to rapid inflows and outflows (as I suspect this one is) are more prone to that type of "turn of fortune".
And, of course, there's that "nasty" other issue of fees, which won't go away. Mona and others have already addressed it thoroughly.
I just don't see anybody being right or wrong in this discussion. Each investor has his (or her) reasons for preferring a specific fund. Then what ends up happening in the future is anybody's guess. I own both VWINX and GLRBX, plus other allocation funds, just because I prefer to use different funds because they don't invest in the exact same way.
Re: "I just don't see anybody being right or wrong in this discussion. Each investor has his (or her) reasons for preferring a specific fund."
Agree with you in my case. Mona's case on fees is harder to refute.
I'll admit to being partial to TRP, despite somewhat higher fees. Rather than a balanced fund, I'd look at one of their fund-of-funds which carry reasonable fees of .65 or less and should provide similar diversification benefits to a balanced fund.
Hi Soupkitchen,
You are correct that there are no absolutes.
However, lets not forget two important things that you can probably bank on in the future with VWINX and GLRBX.
First, the 75 basis point difference in the ER. That creates a significant headwind for GLRBX (or tailwind for VWINX) and if I am flying from New York to Atlanta, my bet is I will arrive sooner with the tailwind.
Second, to overcome the headwind, GLRBX must take increase risks to achieve equal returns. As you know, Sharp and Sortino Ratios are measures of risk adjusted returns. Looking at these, VWINX is the winner in the past 3-Yr, 5-Yr, 10-Yr, and 15-Yr periods. And Standard Deviation has already been addressed.
Just for clarification purposes, I think GLRBX is a very good fund, and I see nothing wrong with owning both. That said, I personally do not see the need to own both in the same (very similar) space and I want to put the odds in my favor to achieve the same or greater return, with less risk.
Mona
Sorry Mona...