In 2000, mutual fund investors overpaid Wall Street $36 billion to manage stocks, bonds, and real estate totaling $3.7 trillion. Nearly 1% per year of assets were wasted in unnecessary fees, according to IndexFunds' comprehensive new survey of mutual fund fees.
[MORE BAD NEWS FOR ACTIVE INVESTORS (comments added by Mark Hebner):
In 2003, we are about in the same situation, but you can now add in scandals of late trading and market timing to the concerns of actively managed funds.
In addition, expanded to a global basis, the problem is possibly 3 times that or $108 billion. In international markets we estimate that expense ratios and loads are about double the US and the total assets outside the US are about equal to US equity market. This obviously varies from year to year. When you throw in the 2003 Dalbar study that indicated the average equity fund investor only obtained about 20% of the broad market return over the last 19 years, due to their active management, the waste grows by about 8% of the total market value of global equities per year! The S&P 500 index has a 77 year history of earning about 10%/year, so investors leave about 8%/year of the market return on the table. By the way, inflation has been about 3%/year for 77 years and taxes on actively managed portfolios have been estimated by John Bogle to be about 2.7% of the value of the portfolio, in taxable accounts. Do the math.
The 12-Step Program to Index Funds elaborates on the global scandal of active management. There is hope, however, because a risk-appropriate globally diversified portfolio of index funds, tilted towards small and value risk factors, allows investors to capture the risk adjusted returns of the market. That portfolio must be held and rebalanced. When done properly, this investment strategy is the solution to the investment puzzle and the prudent alternative to the failed strategy of active management.]
| # of funds considered |
8,545
|
| Total invested |
$3,738,342,970,000
|
| Fees actually paid |
$46,967,540,861
|
| Ave. actual annual expense ratio |
1.26%
|
| Ave. benchmark fund expense ratio |
0.29%
|
| Projected unnecessary expense |
0.97%
|
| Total $ wasted |
$36,188,973,586
|
In every category of mutual fund, well-established and broadly-diversified alternative benchmark funds offer significantly lower fees than the average fees investors actually pay for actively managed funds. If investors switched to such alternative funds, they would significantly lower their cost of investing.
Numerous studies have shown that, on average, fund returns before fees in an investment category will tend to follow the average performance of of that category unless greater risk is taken on. Low fees are therefore the best way for the average investor to maximize their returns. In addition, there are i index funds that are designed to capture risk factors that correlate to higher returns over 70 year periods. These indexes have higher expected returns and lower fees.
Overview
This study sought to examine whether individual U.S. mutual fund investors are paying competitive fees for money management services. It concluded that they are not, due to high management fees.
First, actual fees expected to be paid in 2000 were estimated for 8,545 mutual funds available to individual investors in the U.S. This was calculated by multiplying assets of the fund by annual fees as reported by management.
Second, fees investors would have paid had they invested in a broadly-diversified, low-cost benchmark or fund in the same fund category were computed.
The difference is the amount of unnecessary management expense.
To ensure fair comparisons between the entire universe of mutual funds and low-cost benchmark funds, benchmark funds in each of 41 investment categories were carefully selected.
Active mutual fund investors pay 0.97% of their investment above and beyond the basic cost of investing in their asset class for the privilege of trying to beat the market, a decidedly low probability. This is over three times the cost of basic investing (0.29% on average) in the relative safety of a low-cost benchmark fund, which are broadly diversified within an index or asset class.
List of Benchmark Funds for 41 Investment Categories
| Fund Name |
Symbol |
Investment Category |
No. in Category |
Rank in Assets |
Benchmark Fees |
Excess Fees % |
Excess Fees (Category) |
| Vanguard Aggressive Growth |
VHAGX |
Aggressive Growth |
152
|
31
|
0.46%
|
1.25%
|
1,305,133,872
|
| Vanguard Life Strategy-Mod Gr |
VSMGX |
Asset Allocation - Domestic |
234
|
4
|
0.29%
|
0.90%
|
730,921,418
|
| First American-Strategy Income |
FSFIX |
Asset Allocation - Global |
52
|
23
|
0.30%
|
1.57%
|
205,890,368
|
| Vanguard Index-Balanced Ptfl |
VBINX |
Balanced - Domestic |
313
|
7
|
0.20%
|
0.81%
|
872,453,199
|
| Scudder Pathway Balanced Port |
SPBAX |
Balanced - Global |
18
|
3
|
1.14%
|
0.83%
|
14,312,833
|
| Vanguard Convertible Fund |
VCVSX |
Convertible |
43
|
7
|
0.55%
|
1.13%
|
89,636,373
|
| Vanguard Fixed-High Yield |
VWEHX |
Corporate - High Yield |
265
|
1
|
0.28%
|
1.31%
|
1,064,958,267
|
| Dreyfus Bond Market Index Basic |
DBIRX |
Corporate - Investment Grade |
125
|
2
|
0.15%
|
0.56%
|
122,404,875
|
| Vanguard Emerging Mkts Stock Idx |
VEIEX |
Emerging Market Equity |
76
|
1
|
0.58%
|
1.49%
|
157,214,987
|
| Fidelity New Markets Income |
FNMIX |
Emerging Market Income |
18
|
1
|
1.09%
|
0.60%
|
5,613,054
|
| Vanguard Equity Income |
VEIPX |
Equity Income |
198
|
8
|
0.41%
|
0.54%
|
728,473,221
|
| State Farm Interim Fund |
SFITX |
General Bd - Investment Grade |
324
|
82
|
0.19%
|
0.78%
|
441,574,894
|
| Vanguard Bond Index-Long Term Bd |
VBLTX |
General Bd - Long |
10
|
3
|
0.20%
|
0.25%
|
9,098,667
|
| Vanguard Bond Index-Total Bd Mkt |
VBMFX |
General Bd - Short & Interm |
102
|
1
|
0.20%
|
0.30%
|
75,781,838
|
| Trust for Credit Uns-Mortgage |
TCUMX |
General Mortgage |
65
|
6
|
0.29%
|
0.85%
|
75,163,678
|
| Vanguard Global Equity Fund |
VHGEX |
Global Equity |
320
|
95
|
0.71%
|
0.76%
|
1,561,987,840
|
| Payden & Rygel Global Fixed Inc R |
PYGFX |
Global Income |
196
|
11
|
0.49%
|
0.89%
|
563,757,133
|
| Vanguard Growth Index Fund |
VIGRX |
Growth - Domestic |
1200
|
12
|
0.12%
|
1.22%
|
13,119,974,377
|
| Vanguard Tax Managed-Gr & Inc |
VTGIX |
Growth & Income |
592
|
48
|
0.19%
|
0.98%
|
4,804,795,544
|
| Van Kampen Pr Rate Inc |
VKPRX |
Loan Participation |
13
|
1
|
1.36%
|
0.14%
|
32,953,526
|
| Dreyfus MidCap Index Fund |
PESPX |
Mid Cap |
233
|
34
|
0.50%
|
0.98%
|
1,122,007,719
|
| Northeast Investors Trust |
NTHEX |
Multi-Sector Bond |
110
|
6
|
0.61%
|
0.94%
|
315,100,646
|
| Vanguard Muni-High Yield |
VWAHX |
Municipal - High Yield |
68
|
4
|
0.18%
|
0.74%
|
221,100,105
|
| Vanguard CA Tax Free Insd-IT |
VCAIX |
Municipal - Insured |
120
|
6
|
0.17%
|
0.48%
|
121,358,112
|
| Vanguard Muni-Intermediate |
VWITX |
Municipal - National |
374
|
1
|
0.18%
|
0.62%
|
532,277,696
|
| Evergreen NC Muni Bond Y |
ENCYX |
Municipal - Single State |
1072
|
90
|
0.23%
|
0.80%
|
804,492,039
|
| Vanguard Europe Stock Index Fund |
VEURX |
Non-US Equity |
720
|
7
|
0.29%
|
1.17%
|
2,658,834,250
|
| Vanguard 500 Index Fund |
VFINX |
S&P 500 Index |
68
|
1
|
0.18%
|
0.15%
|
236,286,476
|
| Vanguard Specialized-Energy |
VGENX |
Sector - Energy/ Natural Res |
56
|
1
|
0.48%
|
0.77%
|
41,204,876
|
| Century Shares Trust |
CENSX |
Sector - Financial Services |
47
|
12
|
0.82%
|
1.32%
|
154,656,527
|
| Price (T. Rowe) Hlth Sciences |
PRHSX |
Sector - Health/ Biotechnology |
44
|
7
|
1.11%
|
0.63%
|
137,360,211
|
| Price (T. Rowe) New Amer Growth |
PRWAX |
Sector - Other |
42
|
2
|
0.94%
|
0.35%
|
30,703,951
|
| Vanguard Specialized-Gold |
VGPMX |
Sector - Precious Metals |
30
|
1
|
0.77%
|
1.03%
|
14,741,442
|
| Vanguard Specialized-REIT Index |
VGSIX |
Sector - Real Estate |
78
|
2
|
0.33%
|
0.29%
|
58,619,801
|
| Price (T. Rowe) Sci & Tech |
PRSCX |
Sector - Tech/ Communications |
88
|
1
|
0.87%
|
1%
|
1,181,214,033
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