- LOGIN
- |
- REGISTER
- |
- RSS
- |
- IU IN THE NEWS
- |
- ABOUT US
- |
- CONTACT
- |
- IndexUniverse.eu
|
A new study out of Masstricht University in The Netherlands shines a light in a very dark corner of the mutual fund marketplace—hidden fees, aka agency costs. Hidden fees are yet another reason why index funds and ETFs are a better mousetrap. The fees do not show up in expense ratios, but they can have a substantial impact on returns nonetheless. They include direct brokerage costs, of course, but also more negotiable (and suspect) fees like soft-dollar arrangements, revenue sharing and more. The Securities and Exchange Commission (SEC) is in the middle of an effort to study these costs and find ways to force mutual funds to disclose them to investors. One challenge in learning about hidden fees is that they are, well, hidden. But a group of professors led by Rob Bauer figured out a neat way to make an implicit measurement of their impact. Bauer et al. pulled together a study comparing the performance of mutual funds and traditional pension plans. Bauer's team found that mutual funds underperformed pension plans by a whopping 150 to 250 basis points (1.50% to 2.50%) per year, on average, after accounting for size and various risk factors. Index fund owners did better, with passive funds only trailing their pension plan brethren by 30 basis points (0.30%) per year. Bauer found that direct costs only accounted for a slight difference in performance. They also believe that no real difference could be attributed to skill, because the funds and plans often had similar exposures, and in many cases, identical managers. That left just one explanation for the lower fund returns—hidden fees. Bauer argues that pension plans don't suffer as much from hidden costs, as their larger size allows them to dictate better terms with brokerages and related service clients. |
© Copyright IndexUniverse.com 2007, All rights reserved. Permalink
