15-07-2005 19:38									#1
	Mutual fund management costs 7% per annum! Support Apolyton, buy Civilization: The Boardgame

I'm sure many here have heard of this paper, but it's worth bringing up nonetheless. In short, the expenses of an actively managed mutual fund are normally about 1% per annum while index funds charge about 0.3% per annum. However, the returns for most actively managed mutual funds track index funds rather closely, and therefore should require little active management. Ross Miller at SUNY calculates that managing that portion of the fund's portfolio that actually benefits from active management costs 7% of that portion.

In other words, actively managed mutual funds (i.e., what most of us invest in) are very incredibly expensive when index funds are available to us (my 401k does not offer them, unfortunately). We would be much further ahead just investing most of what we have in index funds.

A corrollary is that while a hedge fund may charge a high percentage in administrative fees in order to manage its investments, the hedge fund does not track the returns of an index fund and therefore is less expensive per unit actively managed. In short, we would do better to invest most of what we have in index funds and a small portion in hedge funds than to invest it all in an actively managed mutual fund.

A corrollary to the corrollary is that the recent huge growth in use of hedge funds is both rational and less risky than our previous setup of actively managed mutual funds.

Quite interesting!

http://econwpa.wustl.edu/eps/fin/pa...506/0506010.pdf

Last edited by DanS on 15-07-2005 at 19:49

	15-07-2005 20:21									#2
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quote: In other words, actively managed mutual funds (i.e., what most of us invest in) are very incredibly expensive when index funds are available to us (my 401k does not offer them, unfortunately). We would be much further ahead just investing most of what we have in index funds.

Well, yeah. That's what I've been saying here for years. Not only that, but over 95% of all managed funds underperform the market over a 15-year period, a percentage that goes over 99% when you remove survivorship bias. I mean, there is a reason why they don't have "life of the fund ROR" or "20+ year ROR" in any fund prospectuses.

	15-07-2005 20:21									#3
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And the reason why your 401(k) doesn't offer indexed funds is...?

Because they want the fees.

	15-07-2005 20:29									#4
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I don't know if my employer is getting a kickback. If not, then I don't think my employer gains anything by not offering the funds. I'm pretty sure that if my employer insisted on index funds, we would get index funds.

	15-07-2005 20:31									#5
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No, not your employer but the plan provider (the company that actually manages your 401(k)) wants the fees. They can't make any money by offering index funds, so they don't.

And if your employer can get the plan managers to offer index funds, more power to them. But you'll get a lot of resistance, some overt, some passive.

"Did you look into the index funds that I provided you?"
"Not yet - I've been too busy."
"But I gave the list to you three months ago!"
"Yeah, well, let me get right on it."

	15-07-2005 20:37									#6
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No doubt. No doubt.

	15-07-2005 20:39									#7
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You could do worse than to get a copy of William Bernsteins The Four Pillars of Investing for some good, yet understandable to the layman, mathematical analysis of the mutual fund industry and their "success."

	15-07-2005 20:41									#8
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I have been a Vanguard Voyager customer for almost a decade now. You are a real financial weenie if you know what that means.

	15-07-2005 20:43									#9
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I liked the piece done by cramer a few weeks ago that clearly indicated that the best way to invest money with mutual funds was to buy the fund stocks themselves not to let them manage your money. They are in the business of making money for themselves. They are not in the business of making money for you.

	15-07-2005 20:49									#10
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As I understand it, Bernstein recommends against any investing in individual stocks. As I have stated previously, I think taking a small portion of your portfolio and investing in individual stocks (or a startup or whatever) is a good move, if you are willing to spend the time in research or effort in managing a small business. This would be similar to the utility of a hedge fund.

	15-07-2005 20:51									#11
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Btw, the only managed fund I have in my portfolio is Dodge and Cox Balanced. The rest are Vanguard index funds.

	15-07-2005 20:53									#12
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quote: Originally posted by DanS As I understand it, Bernstein recommends against any investing in individual stocks. As I have stated previously, I think taking a small portion of your portfolio and investing in individual stocks (or a startup or whatever) is a good move, if you are willing to spend the time in research or effort in managing a small business. This would be similar to the utility of a hedge fund.

Note that Bernsteins book is for the average investor, not the sort of person who enjoys tearing into a 10-K.

	15-07-2005 20:53									#13
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OK. Yeh, I do enjoy tearing into a 10-K.

	15-07-2005 20:54									#14
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10:1 says that over 50% of today's investors in the stock market have no idea what a 10-K is.

	15-07-2005 20:56									#15
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It's a road race.

	15-07-2005 20:58									#16
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One of the nice things about investing nowadays is that Graham's "defensive investor" has very good tools at his disposal versus what used to be. Lately, I have used index funds an awful lot when I'm too lazy to do research.

	15-07-2005 23:10									#17
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quote: Originally posted by SpencerH It's a road race.

See?

	15-07-2005 23:39									#18
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quote: Originally posted by JohnT 10:1 says that over 50% of today's investors in the stock market have no idea what a 10-K is.

I'm guessing it contains all the financial details of a company, hence its interest to investment nerdlings and not the average punter.

My question is, how do they differ from financial accounts fo listed companies? More or less detailed? Or is it the same thing essentially?

	15-07-2005 23:45									#19
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Normally more detailed and without the glossy pictures. Essentially, it's the version of the annual report filed with the SEC. Foreign corporations having listings on an American stock exchange file a 20-F, which is basically the same thing.

	16-07-2005 00:47									#20
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With 10-Qs available on line, you can get 4 times more anal

	16-07-2005 00:54									#21
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I have about 15% of my nav in a hedge fund and just read a nice monthly report of ~1,5% monhtly return on some ridiculously low volatility figure.

	16-07-2005 01:43									#22
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I don't think mine was a managed fund. I can't remember though.

I did look at the costs, and chose one with a low cost. Mine were purchased through Vanguard.

	16-07-2005 02:24									#23
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Actually you still are only paying .7% difference between the funds. They help you diversify which most folks cannot do with stocks alone.

Sometimes even with good research, I pick some bad stocks. I do not seems to have that problem with mutuals.

	16-07-2005 04:34									#24
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quote: Originally posted by JohnT a percentage that goes over 99% when you remove survivorship bias.

Just out of interest is the 'survivorship bias' also removed from the 'market' index that you are comparing against?

	16-07-2005 04:37									#25
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By definition, market based indices will drop poor performing stocks and pick up better performing stocks. However, this is quite different from the survivorship bias of mutual funds where poorly performing funds that close (due to withdrawals caused by poor performance) are not counted in the average mutual fund returns.

	16-07-2005 04:41									#26
	Re: Mutual fund management costs 7% per annum! Support Apolyton, buy Galactic Civilizations: Deluxe Edition

quote: Originally posted by DanS Quite interesting!

Not really

	16-07-2005 05:16									#27
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Which is why you'll always be poor.

	16-07-2005 05:25									#28
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Yeah, would you lot mind explaining to us uneducated rodents how and why we should invest, and what the hell these investment funds are?

	16-07-2005 06:33									#29
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quote: Originally posted by JohnT Well, yeah. That's what I've been saying here for years. Not only that, but over 95% of all managed funds underperform the market over a 15-year period, a percentage that goes over 99% when you remove survivorship bias. I mean, there is a reason why they don't have "life of the fund ROR" or "20+ year ROR" in any fund prospectuses.

It's super hard to constantly overperform the market, though you would expect mutual funds, with all the analysts they have, to manage it. They don't.

	16-07-2005 06:36									#30
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quote: Originally posted by DanS As I understand it, Bernstein recommends against any investing in individual stocks. As I have stated previously, I think taking a small portion of your portfolio and investing in individual stocks (or a startup or whatever) is a good move, if you are willing to spend the time in research or effort in managing a small business. This would be similar to the utility of a hedge fund.

People underestimate the usefullness of a good investment advisor.