The cost of owning the average mutual fund

[Flights of Fancy]

I think it's likely sloppiness or indifference on the advisors' part (if the client is working with an advisor) or lack of knowledge (if the client has no advisor), more than anything else. Plus the fact that checking DSC charges is tedious, time-consuming, and provides no real direct benefit to the advisor.

You can phone the MF company and get the per-unit DSC rates (i.e., 1000 units purchased in 2006, current DSC on those units is % per unit or $ at today's values...). Then if you sell units, you need to confirm that the correct DSC (if any) is charged, because obvs the units are not segregated. (Client has 2000 units, 1000 of which have DSC at 3%, 1000 of which have DSC at 4.5% -- make sure 3% was charged.)

It isn't any more difficult to track than ACB but ensuring the correct DSCs are charged can be time-consuming and may require oversight. When I was an advisor I often made spreadsheets of client's DSC charges (from previous purchases, not with me) and tracked exactly this.

I'm sure that what the planner in Vancouver is saying is accurate in terms of incorrect DSC charges being levied frequently. But I don't know that her conclusion -- that the charges "never go away" -- is accurate. I'd be inclined to characterize it as "the DSC charges are often incorrect and there's not a lot of evidence of them getting corrected after the fact" -- due to a combination of indifference (on the advisor's part) and lack of knowledge (on the client's part).

[marty123]

It is also a chicken-and-egg problem. Americans have a lot more to gain by shopping around. In the US it makes perfect sense to invest even if you can only save a few thousand dollars a year. Buy an index fund from Vanguard and pay almost zero fees. In Canada the same investor would be paying hundreds of dollars of transaction fees. So most Canadians don't know about these products because they (correctly) see them as irrelevant.

TD eFunds allow any Canadian to invest $100/mth at very low fee. A small investor could probably invest that way for 5-10 years before reaching the $100/yr fee mark. Index funds from most other banks would probably reach that threshold near the 5-year mark. I think it's an education problem, rather than one dealing with product availability.

[brucecohen]

TD eFunds allow any Canadian to invest $100/mth at very low fee. A small investor could probably invest that way for 5-10 years before reaching the $100/yr fee mark. Index funds from most other banks would probably reach that threshold near the 5-year mark. I think it's an education problem, rather than one dealing with product availability.

Unfortunately, TD does not really publicize its eFunds. And I suspect that when Joe Schmoe asks about them in a TD branch, he'll get a sell job for TD's MAP wraps.

[BRIAN5000]

squash500 That's an excellent article that you wrote Dan . I agree that with ETFS you have to keep things simple.

https://secure.globeadvisor.com/servlet ... 3/RINDEX23

Rule number one -

Successful indexing comes down to a few simple rules:

Minimize your costs. Aim for all-in fees of less than 0.5 per cent.

If your aiming for fee's of less then 1/2 percent its either DIY and have a large chance of getting it wrong or hire a fee-based advisor occasionally and DIY and maybe have a better chance of getting it right.

How many have a total portfolio MER of less then 1/2 %?

[ghariton]

How many have a total portfolio MER of less then 1/2 %?

Me, for one. The weighted average MER on my equities is about 0.2%. There are also commissions, but I only do three or four trades a year.

George

[NormR]

Me, for one. The weighted average MER on my equities is about 0.2%. There are also commissions, but I only do three or four trades a year.

Seems rather exorbitant to me.

[Icarus]

Me, for one. The weighted average MER on my equities is about 0.2%. There are also commissions, but I only do three or four trades a year.

Seems rather exorbitant to me.

I'd be curious to know your "imputed MER". How many hours a year do you spend on your research, what do you figure an hour of your time is worth, and what percentage of your portfolio is that cost?

Careful! Don't show too much work or we may be able to figure out the value of your portfolio.

[peter]

I'd say most of my 'research' on stock/fund selection has been/is useless although it's been entertaining, while the time spent on figuring out how to deal with RRSP/RESP/TFSA/unregistered accounts would still have been necessary when paying someone else MERs. By far the biggest part of my investments is now in VEA/VTI/VWO/XIU. It seems to me it should be possible to have a weighted 0.2% MER even with imputed MER as described above. Mine is probably higher at the moment because of relatively small contributions with some $29 trades in registered accounts, but contributions should get bigger or stop and trades should go down to <$10 in the future.

[NormR]

Me, for one. The weighted average MER on my equities is about 0.2%. There are also commissions, but I only do three or four trades a year.

Seems rather exorbitant to me.

I'd be curious to know your "imputed MER". How many hours a year do you spend on your research, what do you figure an hour of your time is worth, and what percentage of your portfolio is that cost?

Careful! Don't show too much work or we may be able to figure out the value of your portfolio.

Ah, it'd be fair to say that it'd be a highly negative "imputed MER" in my case. But I'm in the business.

[Icarus]

Ah, it'd be fair to say that it'd be a highly negative "imputed MER" in my case. But I'm in the business.

How can it be negative unless you are subtracting your "alpha"? (That's cheating, BTW. Mutual funds don't get to do that.)

[ghariton]

I'd be curious to know your "imputed MER". How many hours a year do you spend on your research, what do you figure an hour of your time is worth, and what percentage of your portfolio is that cost?

I don't do any research specific to my portfolio any more. I invest in six ETF's, in decending order of importance. (I consider ETFs to be just another form of mutual fund.)

SPY
VTI
QQQQ
XIU
MDY
IWM

I'm the ultimate buy-and-hold investor: I buy only when I have new money, and I sell when I need some money. That ain't often.

Since I don't spend any time on the equity part of my portfolio, the imputed MER is about zero.

I do frequent this forum, and that does amount to a fair number of hours. But that's mostly for fun these days. If anything, the imputed MER is negative.

Don't show too much work or we may be able to figure out the value of your portfolio.

I'm perfectly prepared to make public the dollar amounts. I don't do it because it seems that people in our society (including this forum) think that talking about one's income or assets should be private, and I don't want to flaunt social conventions. But if you're interested, I'll send you a PM.

George

[NormR]

How can it be negative unless you are subtracting your "alpha"? (That's cheating, BTW. Mutual funds don't get to do that.)

See the in the business part. The research is a profit centre via multiple business lines. Think mutual fund company vs mutual fund. If you're a portfolio manager, you get paid for the research and can then use it manage your own portfolio.

[Icarus]

How can it be negative unless you are subtracting your "alpha"? (That's cheating, BTW. Mutual funds don't get to do that.)

See the in the business part. The research is a profit centre via multiple business lines. Think mutual fund company vs mutual fund. If you're a portfolio manager, you get paid for the research and can then use it manage your own portfolio.

I figured afterwards that you meant that. I still think it's cheating a bit, or perhaps not in the spirit of the question. The question, phrased more broadly, is what would someone doing proper due diligence on choosing their own portfolio as a value investor have to impute as an MER? (And yes, of course it will depend on the size of the portfolio.

For myself, as an indexer, I am quite certain that to date if I had paid someone to figure out all of the things that I've had to (and chosen to) figure out I would have been able to make more money working my day job. Of course, I suppose I have to amortize those costs over a lifetime of investing. Plus it gives me the illusion of control, similar to the false control you feel when you play proper blackjack, i.e. by the book; or like the card game "War."

I have a soft spot for value investing myself, at least in principle. In practice, the amount of time it would take for me to learn value investing properly plus the costs of my mistakes and the fact that there is far less than 100% probability of ultimate success (especially since I'm competing with people who are far more educated and do this full time) has made me decide that it is not worth it, certainly not at this stage in my life. The natural response is to find a fund manager that you trust to do it for you because it is cost-effective to do so. I have become convinced, though, that in order to choose a manager intelligently you have to have a very strong knowledge of the processes that you believe will be successful; i.e you have to at least be able to do it yourself, even if you choose not to. The markets may not be perfectly efficient, but I think the evidence is pretty strong that most managers will not beat the index after expenses compared to a DIY investor; and that you can't use past performance to choose.

[heresy]What I'd really like is to develop a way to do big-picture market timing, along the lines of Shiller's P/E 10. Similar to what "hocus" was talking about before he was banned. He looks pretty prescient now, I have to say. To date I've stuck with the buy-and-hold, dollar-cost average, index through thick-and-thin strategy, even though I become less convinced that it is the right way to do things. I also am more open-minded to the possibility that there is validity to technical analysis, properly performed. But I digress.[/heresy]

Interested in the thoughts of others, particularly the non-indexers among us.

[peter]

I think my sentiments are pretty similar. I spent more time thinking about investments a few years ago, then decided it was more useful to spend time working. The amount of money involved was such that a few % more or less didn't make a material difference, but this may change in the future. That makes a balance between DIY and other management an ongoing issue, unfortunately.

A problem with sub-optimal solutions is that it's expensive to fix them. For instance, I have a few US-based ETFs in a RESP that really shouldn't be in a RESP but it's expensive to sell them, deal with currency, and buy something else (expensive relative to their value, not in an absolute sense). More annoyingly, non-registered assets once they actually increase in value incur significant tax penalties for changes. I've decided as I wrote elsewhere today to stick to VEA/VWO/VTI/XIU, which I'm happy with, but for my spouse it's not as obvious as she currently has a negative dividend marginal tax rate on Canadian stocks and her accounts will be able to hold all Canadian stocks in the future, probably.

My pension plan indexes the US and international as they concede there's not much proof that you can win there by stock picking, but it uses active management for Canadian stocks. I'm also intrigued by Norm's, Yielder's and DennisD' results/methods, by Scomac's suggestion a while ago he might be disappointed by the results of stock picking even though he is very serious about it, and by Shakespeare's repeated comment that there historically has been a strong value effect in the Canadian market. I'm amused by Norbert's 'indexing' and Norm's making fun of Norbert straying.

All in all, I'm tempted to buy individual Canadian stocks (ok, my spouse already has several) without thinking about it too much (diversified, taken from XIU/XDV), with the option of more serious value investing (by more concentration and more serious selection) in the future (say, if I get bored with my job or hobbies). If this was a registered account I might be more tempted to buy XIU and reconsider 5 years from now, but in an unregistered account changing my mind 5 years from now might be expensive.

I also thought about preferred shares. For several reasons this wont be an issue soon but if I would have a good case for preferred shares I'd almost certainly at this point participate in an active fund.

[Norbert Schlenker]

[heresy]What I'd really like is to develop a way to do big-picture market timing, along the lines of Shiller's P/E 10....[/heresy]

P/E10 > 20. Get out now.

I'm amused by Norbert's 'indexing'

Hate the sin, love the sinner.

[Icarus]

[heresy]What I'd really like is to develop a way to do big-picture market timing, along the lines of Shiller's P/E 10....[/heresy]

P/E10 > 20. Get out now.

Don't think I haven't been tempted...My gut tells me that I should be selling right now, but I've learned that my instincts are not very good. Still, I really do think the market is overvalued, or at least that the market has priced in a pretty solid recovery that may not materialize.

[scomac]

My pension plan indexes the US and international as they concede there's not much proof that you can win there by stock picking, but it uses active management for Canadian stocks. I'm also intrigued by Norm's, Yielder's and DennisD' results/methods, by Scomac's suggestion a while ago he might be disappointed by the results of stock picking even though he is very serious about it, and by Shakespeare's repeated comment that there historically has been a strong value effect in the Canadian market. I'm amused by Norbert's 'indexing' and Norm's making fun of Norbert straying.

I have spent far too much time this morning looking for that particular quote that I have high lighted; still It was interesting to reread my thoughts on the subject matter over the years. I've been consistent in my position when it comes to investing; favouring active management on a personal level while cautioning about its use in general. I have also been consistent in not necessarily expecting a market beating return regardless of what my actual results have been. I think that point is key because by definition active management means that you should stray from the market 's performance -- sometimes better, sometimes worse with the primary objective of meeting your goals and the secondary objective of beating the market. I did write in late 2007 musing about whether or not the whole process was worth it and contemplating moving an increasing percentage of our portfolios into passive investments. Fortunately, I suppose, I'm slow at enacting any major shifts in strategy like that and have maintained a very active stance throughout the crash and ensuing recovery. This has stood us in good stead and also helped to reinforce the very nature in which active strategies work in relation to the overall market. If a conclusion could be drawn from this experience it would be that the very time you question whether or not there is any value in what you are doing, that is the exact time that you should be doing it because that is when there is the greatest value in it.

[peter]

[

I have spent far too much time this morning looking for that particular quote that I have high lighted; still It was interesting to reread my thoughts on the subject matter over the years. I've been consistent in my position when it comes to investing; favouring active management on a personal level while cautioning about its use in general. I have also been consistent in not necessarily expecting a market beating return regardless of what my actual results have been. I think that point is key because by definition active management means that you should stray from the market 's performance -- sometimes better, sometimes worse with the primary objective of meeting your goals and the secondary objective of beating the market. I did write in late 2007 musing about whether or not the whole process was worth it and contemplating moving an increasing percentage of our portfolios into passive investments.

Sorry Scomac, I didn't mean to make you (or anyone else mentioned above) look back through their large number of contributions! It wasn't an exact quote (hence suggestion), and it did refer to an old post, late 2007 is quite possible. At times I have a long but somewhat inexact memory, but given your thoughtful posts and obvious skill and effort musing whether or not the whole process is worth it made an impression.

I also did not mean to imply that Norbert is a sinner , or that I want to do exactly what any of the people I mentioned do, but, as Icarus, I do like the idea of value investing. I do think I would have the discipline for it, but it's not clear that spending time and effort on it is more efficient than working, and of course it's not clear the results would be better than buying XIU or XDV.

[scomac]

Sorry Scomac, I didn't mean to make you (or anyone else mentioned above) look back through their large number of contributions! It wasn't an exact quote (hence suggestion), and it did refer to an old post, late 2007 is quite possible. At times I have a long but somewhat inexact memory, but given your thoughtful posts and obvious skill and effort musing whether or not the whole process is worth it made an impression.

No apology necessary, peter. It was actually a good thing that I went back through my 59 posts on the general subject of stock picking to see what I was thinking and how I felt about what I was doing with the benefit of now having the results of my efforts as a benchmark.

[Norbert Schlenker]

I really do think the market is overvalued, or at least that the market has priced in a pretty solid recovery that may not materialize.

Me too. But markets climb walls of worry.

I also did not mean to imply that Norbert is a sinner

Why not? It's true.

[kcowan]

I really do think the market is overvalued, or at least that the market has priced in a pretty solid recovery that may not materialize.

Me too. But markets climb walls of worry.

Or market timers make out just fine sometimes.

I also did not mean to imply that Norbert is a sinner

Why not? It's true.

Perhaps not a sinner but a reformed value investor? Or maybe a reformed asset allocater?

[Bylo Selhi]

Reveal the ‘true cost’ of the croupier’s take

Like death and taxes, which are anything but hypothetical, fund costs are one of nature’s few sure things. Mr Bogle likes to call them the “croupier’s take”. As in the casino, they are capable of imposing a serious drag on performance. Costs are irrecoverable and compound over time. In their Global Investment Returns Yearbook, Dimson, Marsh and Staunton estimate the long-run cost of holding equities through funds to be in the region of 3 per cent a year. At that rate costs will eat up 27 per cent of your starting capital over 10 years and almost half the long-run annualised historical equity risk premium.

As certain as fund costs are, the paradox is that measuring exactly how big a bite costs take out of a fund’s performance is anything but. Meaningful standardised information on the true cost of fund ownership, as the FT regularly points out, is hard to come by. The current regulatory requirements on funds to publish total expense ratios and deceptively mild reduction in yield figures (whose significance no investor I have ever met seems to understand) fall well short of full transparency.

Mr Bogle and other proponents of the CMH point out that, among other hidden cost items, TERs do not include the impact of direct and indirect transaction costs, an important omission in an era when the portfolio turnover of the typical fund has fallen to less than a year. The “true” cost of owning an actively managed fund can therefore be much higher than its reported TER suggests...

The only three required inputs are a fund’s published TER, its r-squared (correlation with the index) and the reported alpha, as calculated by Morningstar. The “true cost” is derived by taking the difference in cost between the TER of any given fund and that of an appropriate low-cost index fund alternative and in effect applying this difference to that small proportion of the fund that the r-squared analysis suggests is the only genuinely actively managed component of the portfolio. By stripping out the passive component from the reported alpha, you can also calculate the “true alpha” of each fund.

The original results were striking in highlighting the difference between apparent and “true” performance. The average large cap mutual fund in the US, Prof Miller found, had an r-squared of 0.96 in the three years to 2004, making it all but impossible for them to produce anything materially different from the performance of an S&P 500 index fund. The “true TER” of this kind of fund was nearly 7 per cent and its “active alpha”, on his numbers, a startling minus 9 per cent.

“In essence,” he concludes “large-cap funds taken as a whole consume 7 per cent of the assets being managed as expenses and then generate another 2 per cent of losses beyond that”...

[My bold. Free registration required although you may be able to finesse this with Google.]

Screw that! Reveal the ‘true cost’ of the croupier’s take [PDF]

[newguy]

Truly Acitve Managers Outperform – Being Different is Key

Finally, a study that's fair to all the active managers. Bylo, you'd best be sitting down when you read this .

newguy

[Matt5000]

TD eFunds allow any Canadian to invest $100/mth at very low fee. A small investor could probably invest that way for 5-10 years before reaching the $100/yr fee mark. Index funds from most other banks would probably reach that threshold near the 5-year mark. I think it's an education problem, rather than one dealing with product availability.

Unfortunately, TD does not really publicize its eFunds. And I suspect that when Joe Schmoe asks about them in a TD branch, he'll get a sell job for TD's MAP wraps.

TD doesn't sell eFunds at the branch, the branch staff generally isn't even aware of them.
At the low MER they can't afford to have someone sit down and talk you through a plan, someone has to pay for this, and that is what the high MER of the bank fund is for.

[Spiff]

Truly Acitve Managers Outperform – Being Different is Key

Finally, a study that's fair to all the active managers. Bylo, you'd best be sitting down when you read this .

The low volatility point is bad, IMHO, because, empirically it turns out that volatility has been negatively correlated with returns ...