Fund fees: Why ‘the house’ always wins

When double-digit stock market gains were par for the course, mutual-fund investors didn’t give much thought to how much money they doled out in investment fees each year, said Reshma Kapadia in SmartMoney. “But with investors still smarting from last year’s crash,” and most likely facing years of relatively flat returns, that’s changing. “The hunt for lower fees has become a crucial part of a sound investment strategy.” The point isn’t just to increase your future earnings, but to defend what you’ve got: This year as fund companies look to “make up for dwindling fund assets,” the average fee is set to increase some 6 percent, according to Morningstar’s estimates.

For some investors, high fees are even turning what would be profits into losses, said Jason Zweig in The Wall Street Journal. If an actively managed fund is up, say, 20 percent over a year, paying 1.5 percent in fees simply reduces your gains slightly. But if the fund’s up only 1 percent, that kind of fee will “stick you with a 0.5 percent net loss.” Time to take off your “blinders,” and look at fees in terms of absolute dollars rather than percentages. Start by multiplying a fund’s annual expense rate by the total amount of your investment. “That is roughly what will be deducted automatically from your account over the year.” Compare your net returns to what you would have earned by placing the same principal in a “hypothetical basket of low-cost index funds” that invest in the same sectors as you do now. See how the funds stacked up over the past year, and consider whether the returns justify the cost.

I’ll bet you right now they don’t, said Scott Burns in The Austin American-Statesman. While there is “no evidence” that higher fees equate to higher returns, there is “much ­evidence” that higher fees actually spell lower returns. Over the past ­decade, the large-company stock funds with the cheapest fees returned 0.16 percent a year, according to Lipper Analytical Services, while the funds with the priciest fees lost 1.64 percent a year. This suggests that investing money with most fund managers is not unlike gambling at a casino. “The longer you play, the greater the odds that the house will have your money and you won’t.”

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