As each new year rolls around, we at Anderson Griggs go through certain processes, evaluating both the economy and the investment industry. One of the things we study is the fees charged to investors so as to know where we fit in with our competition. As I was running my evaluation of mutual funds, using Morningstar's Principia program, something quickly jumped out to grab my attention. For the 2008 year, ending December 31st, the average gross expense ratio for the 26,000+ mutual funds Morningstar follows, was 3.15%.
Various funds charge different fees, but the expense ratio is basically what it costs an investment company to operate a mutual fund. These operating expenses are paid for from the fund's assets, lowering the return to the fund's investors. The largest component of these operating expenses is the fees paid to the fund's investment manager (the management fees paid for by investors). This operating expense is also composed of other costs such as accounting and auditing fees, taxes, legal expenses, record keeping, and custodial services. If the mutual fund incorporates 12b-1 fees, or the cost to market the mutual fund, they would also be included within the expense ratio. For 2008 the average 12b-1 fees for these 26,000+ mutual funds was .34%. The hidden cost of trading, or the bid/ask spread is not included in the expense ratio, and neither are any front-end load or redemption fees if they are employed
So what did I find surprising about this 3.15% expense ratio for 2008? Well when I went back to look at my numbers for 2007, the average expense ratio for the 25,000+ mutual funds tracked by Morningstar was 1.77%. That represents a 78% increase in the expense ratio, an entire 1.38% rise in cost to the investors of mutual funds on average. What does this mean for investors using mutual funds? I will turn to John C. Bogle for my answer, taken from his The Little Book of Common Sense Investing.
"If investors could rely on only a single factor to select future superior performers and to avoid future inferior performers, it would be fund costs. The record could hardly be clearer: the more the managers and brokers take, the less the investors make."
In summation, an investor needs to know the fees that they are being charged, and then do what they can to limit those fees. This is one of the first things we do with new or potential clients at Anderson Griggs Portfolio Management. Lowering investment fees and cost is by far the simplest and easiest way to enhance long-term performance.
Anderson Griggs & Company, Inc., doing business as Anderson Griggs Portfolio Management is a registered investment adviser with the US Securities & Exchange Commission. Pursuant to laws and regulations Anderson Griggs also maintains notice filing with several individuals state regulators including North and South Carolina. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirements for advisors. This commentary is for information purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part II to a client in an authorized jurisdiction and receive a properly executed investment Management Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs Investment Objective, individual account, or index. The authors of publication are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Portfolio Management's office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.