Monday, 30 September 2013

Mutual Fund Sales Charges and Your Fund Performance

Its no secret that many mutual funds are a bit of a ripoff.  There's so many fees hidden and buried in many of the less reputable ones (thankfully that's starting to change) that are completely unjustifiable.

One such fee in my opinion is sales charges.  There's several ways they can work but the most common are front end sales charges and are usually in the 5-6% range.  What happens is that when you invest in that fund, your contribution (lets say $100) will have the sales charge be deducted (lets say 5.5%) so you'll end up investing only $94.5 instead.  That's a horrendous drop in return to begin with.

Other variations of sales charges are back end, deferred, etc etc.  But with so many sales charge free (or no load) funds nowadays, why bother?  Some justification is that sales charges can help pay for better managers which allow the funds to outperform.  Does it?

In my MarketWatch article being published soon, I did a study on large actively managed value funds and took a quick look at this exact question.  What did I find?

Looking at only the 10 largest value funds by asset, I plotted their 10 year return vs total fees.  The funds with sales charges do actually have a slightly better return than the no sales charge ones so there may be something to it.

However!  If you do the return after accounting for the loss from the sales charge, you'll find the performance benefit virtually disappears and you end up at basically the same performance as the non-sales charge.  So yes, some funds with sales charges do outperform but very few do and even the ones that do end up being useless for the investor because the extra return is lost anyway.

Moral of the story?  Don't bother with sales charge funds to begin with.

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