Wednesday, February 27, 2013

If You Can't Beat 'Em, Join 'Em

The Journal of Indexes had an interesting article in its March/April 2013 magazine titled "Are Active Mutual Funds Becoming Less Active?"

The conclusion is that yes, active mutual funds ARE becoming less active. One theory behind this movement is that the managers are moving to an indexing management style. Since there has been mounting evidence of increased correlation in the stock market, a manager's "ability" to to choose a security which would outperform the average of the index has become increasingly difficult. Some would argue that there has never been a manager that has been able to outperform his or her index except for pure luck, but we'll save that for another story.

If indeed the active mutual fund managers are moving to an indexing style of management, it is even more important for the investor to look at the cost of doing business with that mutual fund. Many equity mutual funds have internal fees ranging from 1 1/2% to 1 3/4% or more. When these fees are put up against index ETF fees which may range as low as 0.05%, underperformance of the more expensive mutual fund is almost a guarantee.

While consumers may roll their eyes at 1 1/2%, remember, it adds up to real money. For a portfolio of $1mm, that 1 1/2% represents $15,000 per year on wasted mutual fund fees. That is money that could be going to the investor rather than the mutual fund company.

As individuals with larger portfolios enter retirement and search for ways to fund retirement and create retirement income, they should carefully investigate mutual fund fees. $15,000 a year is a lot of money to waste. 

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