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Study: U.S. Investors Waste $36 Billion on Wall St. Fees

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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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