Wall Street WARZONE
Fund Managers Are Secretly Getting Rich by Hiding the High Costs of Trading from You: Vanguard’s Jack Bogle Offers 4 Key Rules to Protect Your Returns
by Paul B Farrell, JD, PhD
| Discuss | Print | 5/2/2010

Worried about your mutual fund returns? You should be. Check out Anna Prior’s Journal article, The Hidden Costs Of Mutual Funds: “Portfolio managers can rack up steep expenses buying and selling securities, but that burden isn’t reflected in a fund’s standard expense ratio. Jack Bogle the founder of Vanguard Murual Funds, and the man behind the popular no-load low-cost index fund idea, warns that mutual fund owners and their managers are essentually running “gambling casinos,” raking an unconscionable 33% off the top of the returns due America’s 95 million Main Street investors. Bogle calls it the “croupier’s” take. Prior focuses on the excessive (and hidden) trading costs that fund companies hide from their investors:

How much does it cost you to own a mutual fund? Probably a lot more than you think. In selecting mutual funds, most investors know to check the expense ratio, the standard measure of how costly a fund is to own. U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar Inc. But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times more costly than advertised …   (More)

Mutual Fund Portfolio Managers: He Made $436,500? And You Lost How Much? Not Fair!
by Paul B Farrell, JD, PhD
| Discuss | Print | 5/1/2010

Nice work if you can get it! Americans invest over $10 trillion in mutual funds. There are about 70,000 portfolio managers. Average compensation was around $436,500 annually a few years ago. With 10 years experience, the average jumped approximately $1.8 million annually. Unfortunately, in spite of their fabulous compensation, they still hate indexing even though each year 75-85% of them cannot beat their indexes, and only one manager has been able to beat the S&P 500 every year for the past fifteen years. His streak ended in the credit meltdown. Thanks to a network of highly effective lobbyists, a protective Congress and a pro-management SEC, managers continue “stealing” one third of Main Street investors’ returns in broad daylight, with no serious legislative and regulatory oversight.

The Economist magazine offers a textbook description: “Imagine a business in which other people hand you their money to look after and pay you handsomely for doing so. Even better, your fees go up every year, even if you are hopeless at the job. It sounds perfect. That business exists. It is called fund management. … The average profit margin of the fund managers that took part in a survey by Boston Consulting Group was a staggering 42%. In part, this is because most fund managers do not compete on price.” (More)