Mutual Fund’s Undisclosed Costs

By on March 2, 2010

Anna Prior, reporting for the Wall Street Journal, exposes the mutual fund industry’s dirty little secret – the expense ratio doesn’t disclose all of the costs of owning actively managed funds. In the following excerpt, the results of studies expose some ugly statistics:

“The average investor can’t really even begin” to get a strong grasp on these additional costs, says Richard Kopcke, an economist at the Center for Retirement Research at Boston College who co-wrote a recent study about fees and trading costs of mutual funds in 401(k) plans. “There’s just not enough information. Not even close.”

Even experts come up with some very different estimates. Mr. Kopcke’s study looked at the 100 largest U.S.-stock funds held in defined-contribution plans as of December 2007 and found trading costs for the funds that averaged from 0.11% of assets annually in the quintile with the lowest costs, to 1.99% of assets in the quintile with the highest costs, with a median of 0.66%.

A study updated last year of thousands of U.S.-stock funds put the average trading costs at 1.44% of total assets, with an average of 0.14% in the bottom quintile and 2.96% in the top. Expenses are one of the most important things investors can look at, says study co-author Richard Evans, an assistant professor of finance at the University of Virginia’s Darden School. “We find that our estimates of trading costs” are an important predictor of performance. While “some trading actually adds value,” Mr. Evans says, high trading costs overall tend to have a negative impact on performance. On average, $1 in trading costs decreased net assets by 46 cents in this study.

Source: The Wall Street Journal
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