A. Of course. Expenses -- in great detail -- are one of the major types ofdata that Lipper collects and analyzes. And it DOES seem as though latelythere has been more attention on them.
A. Well, I think it's the market climate. When equity funds were rockingalong, "who cared?" about the costs. If you're making 30 or 40%, whatdifference does a half percent from the average cost mean? NOW, peoplehave lost some money in a lot of equity funds and are more sensitive to howmuch they PAID for that result. PLUS, I think since bond funds have lowerreturns the expense part of the equation is a bigger proportion of thewhole.
A. First, as a definition, these are NOT commissions or loads for buyingor selling the fund. These are the recurring expenses of RUNNING the fundevery year. Second, you can get almost any answer you want depending onhow you cut the deck. Overall, the median expenses have edged down just alittle over the past 5 years. And finally, the expenses vary greatly bySIZE of fund and by investment objective.
A. Sure...
Sector Equity Funds: 1.70Of course, these change slightly all the time as we get the latest numbersin for each of about 14,000 U S funds, throughout the year.
Q. Why are the costs so different by type of fund?
A. Well, I think it's mainly a case of the amount of work (research, etc.)involved in running different kinds. If all you invest in is US Treasurypaper, that takes less research than following foreign companies andeconomies and currencies in 40 countries around the globe.
And I think there is also an element of 'what the traffic will bear.' Fundcompanies want you to park your money in their money fund and the yield isgoing to be low, so they probably accept lower profit by keeping the feesdown a bit.
Q. Now, just WHEN is it that the funds charge the shareholder theseexpenses?
A. Actually, when they compute the NAV of the fund every day, theysubtract out a pretty sharp estimate of the costs of running things PERDAY. So it comes out in tiny slices all year long.
Q. So there's no way of avoiding it, like not buying a distribution inDecember.
A. Right.
Q. What are the biggest components of the overall expense ratio?
A. The advisor's fee is usually #1. If there is a 129(b)-1 fee, thatwould be #2 or #1. Everything else is small line by line... custodian,transfer agent, legal, directors' fees, printing and postage, and so on.They tend to be a few basis points each.
Q. You said that expenses tend to differ by SIZE of fund as well?
A. Right. Classic economies of scale. Many costs are fixed or semi fixed.You pay a portfolio manager about the same salary to run a start-up$1-million fund as to run $500 million. Legal and directors' fees changelittle with fund size, but as a percentage of assets they decline as thefund grows.
Q. Now, when you quote those percents, what is that a percent OF?
A. A percent of the average net assets (which are computed daily), or morepersonally you can also think of it as a percentage of the money you haveinvested. If you have $50,000 and the expense ratio is 1%, your cost is$500/year.
Q. How important is it all, Don?
A. Well, to some people it is highly important. That is one of the bigarguments for index funds: keeping your costs low to help your return. Anextra half a percent or more WILL compound to a lot of dollars over alifetime. But I see the other side too: in kinds of funds where there is awide range of possible results, I'd rather have the BEST manager (if I canfigure out who that will be) and pay more, than get a bargain manager.Like choosing an orthopedic surgeon...
Q. But you can never be sure, since performance does not always continue.
A. True. So that uncertainty about returns adds to the argument for tryingto help your odds in whatever ways you CAN, namely by curbing expenses.
