Spotlight’s on Index Funds’ Expenses
| Jan 14th, 2007 | Filed under: Investment Management Fees | By: Alpha Male |
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By: Lawrence Strauss, Barron’s
Published: January 15, 2007
There is little argument that many mutual funds contain a whack of beta and very little alpha. So a mutual-fund-replicating portfolio comprising explicitly of both alpha and beta would naturally require a lot more beta than it would alpha. That’s why the price of beta is so critical to making a synthetic mutual fund portfolio work.
But unfortunately, not all beta is cheap. While institutions can often get beta “thrown-in for free” from their active manager (even at a “negative management fee” if they lend out this stock), retail investors can blow the bank if they don’t watch out. This article in this week’s Barron’s shows that index funds (a popular source of beta) range in cost from 0.07% to 1.45% (20 times higher!).
What could possibly justify such a wide price range? According to Barron’s, part of the reason is the 12b-1 fee (“marketing fee”) charged by the higher priced funds. For non-US readers, “12b-1″ is essentially a nifty synonym for “adviser’s trailer”. A Wake Forest University study says approximately two thirds of 12b-1 fees get funneled back to the advisers who recommended the fund. But According to Barron’s, the Chief Economist of the Investment Company Institute says the real proportion going back to advisers is closer to 98%(!)
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