The cost of owning the average mutual fund

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newguy
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Re: The cost of owning the average mutual fund

Post by newguy »

Spiff wrote:The low volatility point is bad, IMHO, because, empirically it turns out that volatility has been negatively correlated with returns ...
For individual securities, not balanced portfolios like a mutual fund AFAIK.

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Re: The cost of owning the average mutual fund

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newguy wrote:
Spiff wrote:The low volatility point is bad, IMHO, because, empirically it turns out that volatility has been negatively correlated with returns ...
For individual securities, not balanced portfolios like a mutual fund AFAIK.
Do you have a empirical source for that? Or are you referring to balanced funds (i.e. bond/stock mixes)?
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newguy
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Re: The cost of owning the average mutual fund

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Spiff wrote:Do you have a empirical source for that? Or are you referring to balanced funds (i.e. bond/stock mixes)?
I'm pretty certain that's what the study is calling conservative funds.
Leaving a margin for error, 23% of funds (74 funds) are between 10-40% less volatile than the TSX. Are these funds even trying to beat the index?
I would imagine these funds are trying to reduce volatility, the easiest way is some type of balanced fund.

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Re: The cost of owning the average mutual fund

Post by twa2w »

There was an article in the FP last week - sorry can't find link - by Laurent Barras from McGill U.

He analyzed how many funds added value - he used some method of differentiating between luck and skill. check for 'False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas' at www.ssrn.com for how he did this.

At the end of 2006, only 1% of funds outperformed passive benchmarks after costs. In fact he said 24% actually destroyed value.
He compared this to the early 90's when almost 15% of funds outperformed.

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Re: The cost of owning the average mutual fund

Post by DenisD »

twa2w wrote:There was an article in the FP last week - sorry can't find link - by Laurent Barras from McGill U.
The link: Is performance worth the price?
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Re: The cost of owning the average mutual fund

Post by DanH »

[beating limping horse]

More evidence that Canadian funds are not the world's most expensive
I wrote:My aim isn’t to defend the fund industry. I simply maintain that no study is sufficiently complete to make meaningful global comparisons of the total costs that investors bear to invest in and hold mutual funds. Until that happens, any statement regarding where Canadian fund fees rank among its global peers is simply speculation.

More importantly, I’ve argued that the debate over average fees is simply academic. In the April 2008 issue of Investment Executive I reason that average fees don’t matter if we have enough breadth of choice to satisfy do-it-yourself investors and advice-seeking investors (whether their advisors are paid by commissions or separately-billed fees). In other words, averages are meaningless if everyone has what they need.
[/beating limping horse]
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Re: The cost of owning the average mutual fund

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From this article.
It is in the compensation where the confusion over cost arises. In Canada, most advisors are compensated almost entirely through the trailer fee, which is paid from the MER. Front end load charges are waived in about 95% of purchases, Rodrigues says.

In the U.S., the front end load cannot be waived as it is defined in the prospectus of the fund.

"They have to do that because in the actual total expense ratio (TER) that is reported in the U.S., there is very little in terms of compensation for the distributor," Rodrigues explains. "It is usually in the form of the 12(b)1 fee, but that's only 25 basis points, and that's not enough to compensate your advisor."

On an 'apples to apples' basis, the vast majority of investors in Canada and the U.S. incur a comparable cost of ownership when purchasing mutual funds with the assistance of an advisor, the study finds.

To get the apples-to-apples comparison, researchers focused on funds sold by financial advisors, as the majority of investors on both sides of the border buy their funds through an advisor.
The article also links to the full research report.
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Re: The cost of owning the average mutual fund

Post by kcowan »

DanH wrote:The article also links to the full research report.
Thanks Dan. I feel so much better now knowing that the US are in as bad shape as Canada!
For the fun of it...Keith
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Re: The cost of owning the average mutual fund

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kcowan wrote:
DanH wrote:The article also links to the full research report.
Thanks Dan. I feel so much better now knowing that the US are in as bad shape as Canada!
It's not my research and I'm not sure I fully buy Bain & Co's conclusions either. Perhaps it depends on what they mean by "comparable".

It seems to me that the best comparison done to date was featured early on in this thread's history. Heck, her 2003 paper is hosted on this very website. And it seems that my crude analysis from seven years ago - was unaware of Ruckman's paper at the time - remains bang on when trying to quantify pure fee differences. So it seems the nine-fold difference in population is worth about 40 basis points or so in annual fee savings.

For DIY investors, however, the difference might be larger - but only when comparing fully loaded funds to the US' unbundled versions. Canadian no-loads are quite competitive overall. In other words, it's more research and more debate without really additional insights. My recent blog post, however, noted above touches on a cost component that nobody has compared to date - because the data isn't readily available. Brokerage costs incurred at the fund level have been ignored by everybody but it's part of the total (albeit unpublished) cost. Well, I'll just stop here since the link is above and the illustrations somewhat telling I think.

Added: Canadian fund fees revisited
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