Archives For Mutual Funds

Check this out. I found this on page 161 of Christopher Jones’ book, The Intelligent Portfolio*, regarding mutual fund fees. I never really looked at fees in this way.

The aggregate numbers on the magnitude of investment fees are sustantial. For example, look at the fees charged by mutual fund companies. According to the Investment Company Institute (an industry trade group for the mutual fund industry), mutual fund assets totaled $10.4 trillion at the end of 2006 (yes, that is trillion with a “t”)**. Equity mutual funds alone held $6.6 trillion in assets. The average fee for these equity funds was 1.07 percent per year on an asset-weighted basis. This implies that investors paid over $70.6 billion in management expenses and load fees alone in 2006. In addition, there was over $1.5 tillion invested in bond mutual funds, generating an estimated $12.4 billion per year in fees. Money market fund accounted for another $2.4 trillion in assets and generated an estimated $9.6 billion in fees for hte fund industry. Adding it all up you get to a grand total of $92 billion in annual mutual fund fees—a lot of money by anyone’s standards. Putting these fees into perspective, $92 billion is equivalent to an average payment of about $300 per year for every man, woman, and child in the United States. And this estimate does not even include the many trillions of dollars managed by institutional investment managers outside of the mutual fund industry, nor the costs associated with brokerage commissions, transactions fees, custody fees, account fees, and other advisory fees. needless to say, the investment management industry is a very big and lucrative business.

That paragraph was written using 2006 data. I did a little research and found that according to the latest report, the average equity mutual fund has a fee of .99 percent. I also noticed that the 2006 numbers were adjusted downward by one basis point to 1.06 percent. According to that same report, it’s not likely that fees will continue to drop:

Recent press reports have suggested that fund expense ratios could begin to rise owing to the market downturn that began in the fall of 2007 and the attendant decline in the assets of stock mutual funds. No such increase in fund expense ratios is evident in this paper, but experience from past market cycles indicates that a rising trend is possible. During the market downturn that lasted from early 2000 to early 2003, for example, average expense ratio of stock funds rose several basis points.

Why might declining assets lead to rising expense ratios? There are a number of reasons; two stand out:

• Some fund expenses are relatively fixed. Among other things, these include transfer agency fees (which tend to be charged as a fixed number of dollars per account), the cost of mailing fund literature, accounting and audit fees, and director fees. When fund assets fall, these fixed costs will rise as a percentage of assets, tending to boost a fund’s expense ratio.

• Some fund complexes offer “breakpoints” in the management fee that they charge their funds. Such a fee structure reduces the fee rate as the fund’s assets grow, sharing with investors the benefits of economies of scale. As asset levels fall, the fund may lose some of the benefi t of those reduced rates, resulting in a higher expense ratio.

It stinks that when account values are dropping, fund expenses tend to increase. But, I suppose the opposite is true when account values are increasing. The skeptic in me wonders if fees fall as quickly as they rise? Regardless, investment management is big business.

*Affiliate Link
**Source: Research Fundamentals: Fees and Expenses of Mutual Funds, 2006 (PDF)

Poor Bill Miller…

December 11, 2008

Take a look at this graphic that was in yesterday’s Wall Street Journal. It’s a graph of the performance of the Legg Mason Value Trust, managed by Bill Miller, against the S&P 500 Index.

According to the article ($), the Value Trust is down 58% this year alone! Why? Because Bill Miller made bets on AIG, Wachovia, Bear Stearns, and Freddie Mac. OOPS!

Another reason to index?

I received this email last week:


I found your blog thru real simple magazine. Props to you. Nice.

So here is my question, 44 years old, female, broke my whole life, no savings, wanna change. Came into 18K (my Dad died) and I don’t know what to do with it. It has been sitting getting like 2% since December 07. So if you can help or have a suggestion great, if not I understand.



First things first. If you’re broke, you probably need an emergency fund. If you don’t have access to 3 months of expenses, you need to save towards that goal first. Just make sure that you treat your emergency fund as just that: an emergency fund.

After that…

I try to refrain from giving specific advice on this blog. That said, I would DEFINITELY put this money away for the long-run by opening a Roth IRA and depositing $4,000 per year for the next 4+ years. As far as where to open your Roth IRA, I would say either a discount broker like Scottrade or a mutual fund company like Vanguard (I’m NOT necessarily recommending these companies). The easiest route to go would be a fund company like Vanguard. Vanguard offers lots of low-cost index funds as well as exchange-traded funds. The simplest route to go would be to go with a target retirement fund. Since you’re 44 years old, I would considering looking at Vanguard’s Target Retirement Fund 2030 (other mutual fund familes have target date funds that are worth looking at).

I wouldn’t stop there.

Based on some simple math, I figured that your $18,000 lump sum will be worth somewhere in the neighborhood of $65,000 at retirement (assuming a 9% rate of return minus a 3% inflation rate). That’s hardly enough for a comfortable retirement. I would make saving for retirement a big priority. If you have access for a company-sponsored retirement plan, use it. If not, you should try to save at least $4,000 per year towards your retirement. Doing so could give you nearly $184,000 at retirement (again, adjusted for inflation). It’s not a lot but it’s better than nothing.

Good luck!

Fees Matter!

February 5, 2008

Okay, we all know that investing involves fees. However, did you ever think about just how much you could spend in fees over a 20 or 30 year period? It’s probably a lot more than you think it is. Why? Because fees compound along with the growth of your investment. And, even in down years, you are still charged a managment fee.

To get an idea of just how big of a bite a managment fee can take out of an account, I put together a couple of graphics. The first one assumes a 20-year investment period of a $10,000 lump sum investment (not including mutual fund sales charges or loads). Each section of the graphic looks at a different annual rate of return along with different annual expenses. The returns were calculated by subtracting the annual management fee from the rate of return and using that number to get the growth factor. Then the growth factor was multiplied by the $10,000 lump sum to get the future value of the investment. Make sense? If not, the graphic should explain it:

Fees Matter

Wow! A 3% management expense nearly ate up half of the growth of the investment! Granted, 3% is a very high expense ratio. I included it because some variable annuities charge that much per year if you get all their “bells and whistles.”

Anyway, if you thought that was bad, take a look at what happens over a 30-year period:

Fees Matter

At the 3% expense ratio, the amount spent on management fees was actually MORE than the account was worth at the end of the 30-year period! For instance, take a look 10% ROR section of the last graphic. Assuming a 3% expense ratio, at the end of 30 years the account would be worth $76,123 but you would have spent over $98,000 in fees over the 30-year period. Compare that to the account with the .50% annual fee, which would have grown to over $152,000 over the same period. That’s quite a difference.

Bottom line: Fees matter. You’re not gonna get something for nothing, but there’s no reason to spend more than you have to.

More follow-ups to come…

Here’s a list (check it out here ($) I found in today’s Wall Street Journal of some mutual funds that have low minimum initial investments. All funds listed are supposed to be no-load mutual funds with relatively low management expenses. Where available, I included a link to the mutual fund’s website.

NOTE: Upon further research, I think this list was based on this article ($) in Smart Money.

Elfun International Equity (EGLBX)
Minimum Initial Investment: $500
Management Expense Ratio: .18%

CG Capital Markets Large Cap Growth (TLGUX) – Minimum Initial Investment: $100
Amana Income (AMANX)
Minimum Initial Investment: $250
Management Expense Ratio: .77%

Amana Income (AMAGX)
Minimum Initial Investment: $250
Management Expense Ratio: 1.37%

Amana Growth (AMANX)
Minimum Initial Investment: $250
Management Expense Ratio: 1.36%

State Farm Growth (STFGX)
Minimum Initial Investment: $250
Management Expense Ratio: .12%*

Excelsior Blended Equity (UMEQX)
Minimum Initial Investment: $500
Management Expense Ratio: 1.10%

Schwab Health Care (SWHFX)
Minimum Initial Investment: $100
Management Expense Ratio: .84%

Hodges (HDPMX)
Minimum Initial Investment: $250
Management Expense Ratio: 1.42%

State Farm Balanced (STFBX)
Minimum Initial Investment: $250
Management Expense Ratio: .13%*

Pax World Balanced (PAXWX)
Minimum Initial Investment: $250
Management Expense Ratio: .94%

*These expense ratios seem extremely low to me. I’m going to investigate this further.

UPDATE: I sent the author of the article and email and asked him about the expense ratios for the State Farm funds. This was his reply:

We debated whether to include funds like State Farm and Elfun on our tables, since they are only open to company employees, for the most part. But in these cases, the funds have such a large shareholder base, good performance and low fees that we felt compelled to include them. In the future, though, we are going to put an asterisk next to such funds.

There was a very interesting article, Mutual Funds Get Mad ($), in the Wall Street Journal today about how mutual funds are becoming activist investors when they see companies doing things that hurt their (the mutual fund’s) returns. The article profiled T. Rowe Price’s effort to stop a buyout of Laureate Education led by Laureate’s CEO and a private equity firm.

According to the article, the T. Rowe Price’s resistance to this particular deal was that the buyout offer was for 80% less than the company was worth.

One of the issues that the article brings to light that I hadn’t really thought about is that more and more deals are being led by company insiders and private equity firms working together. Since their goal is to get the firm as cheaply as possible, it puts the company insider at odds with shareholders. It’s a huge conflict of interest.

Anyway, mutual fund companies are beginning to take notice and are taking steps to stop deals that aren’t good for them. I think this is great!

One of my readers sent me a link to a recent article by Rober Kiyosaki titled Playing the Mutual Fund Lottery. I can sum this article up for you in one word: DRIVEL! The point of the piece is that mutual funds (ALL mutual funds since he doesn’t make any distinctions) really aren’t much better than playing the lottery. Here are a few quotes from the article:

But isn’t there a better chance of making money in a mutual fund than there is in the lottery? Hardly. There may be less of a chance of losing all the money you put into a mutual fund than there is of losing all the money you put into lottery tickets, but you’re never going to win big in a mutual fund.

In fact, mutual funds are designed to minimize your returns by creating a “balanced portfolio.” If they could minimize the risk of the market itself, that might be OK. But the problem is that nobody can minimize the risk of the market without sophisticated hedge strategies that aren’t typically used in mutual funds.

“…you’re never going to win big in a mutual fund”

I’m thinking this could be the problem for most people: they all want to win big. What about winning smaller amounts over time? It’s the “winning big” mentality that hurts so many people over the long run. Why? Because they take on more risk than they should tyring to “win big.” Think back a few years ago when seemingly everybody was making a killing in internet stocks. I knew of a guy who retired from a long career and put ALL his money into Worldcom stock. He did this for no other reason than to try to “win big.” Guess what, he LOST BIG! He lost it all, or most of it and the sad part is, he doesn’t have a long career in front of him to make up the difference.

…mutual funds are designed to minimize your returns by creating a ‘balanced portfolio.'”

Huh? Not ALL mutual funds are balanced. Doesn’t Robert know this?

One final dose of hogwash:

If you don’t like the idea that most of the money spent on lottery tickets supports government programs, you should know that most of the earnings from mutual funds support investment advisors’ and mutual fund managers’ retirement.

You take all of the risk, you put in all of the capital, but most of the money goes to the fund manager and your investment advisor. Lottery funds go to worthy causes like schools and the arts, so which is better?

“You take all of the risk, you put in all of the capital, but most of the money goes to the fund manager and your investment advisor.”

MOST of the money goes to the fund manager? How so? Again, even if this were true of some mutual funds, it’s not true of all.

Personally, I think articles like this are representative of what you get from Kiyosaki – NOTHING. Go back and reread the article. Notice how he raises your curiosity but doesn’t give any answers. My guess is that you won’t get the “answers” until you fork over the money for one of his “coaches. Better yet, why not just play the lottery?