The Alchemist: Expense Ratios

Posted in Money Matters on December 23, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “Expense Ratios.”

The Alchemist: Expense Ratios

by Al Thomas


Mutual funds and brokers are always preaching not to buy
any fund with a high expense ratio. That is the annual costs of the fund
to pay for trading of stocks within their portfolio, salaries, rent,
telephone, analysts, etc. Most of them tell you not to buy one that
exceeds 1.5%. There is also another expense added by some mutual funds
called a 12b1 (usually from ¼% to 1%) that is supposed to be used for
promotional purposes only. These numbers may appear small, but they are
being applied to multi-millions, sometimes billions of dollars.


The 12b1 is for advertising of the fund to bring in more
investors. The more customers, the more money in the fund, spreads
expenses over a greater amount of money and should reduce the expense
ratio.


We have seen allegations recently that many funds are
putting the 12b1 in the pockets of the fund managers and even as the
fund gets larger and larger the expense fees have not been reduced.


I won’t be discussing here the loads (commissions) charged
as I see no reason to buy any fund that charges commissions; there are
thousands of no-load (no commission) funds that outperform the load funds.


For example, here are 2 funds. The first is Pioneer Fund
which incidentally has a commission charge of 5.75% with a price per
share increase of 22% in 2003 and an expense ratio of 1.11%. Another
fund Yacktman Focus Fund with no commission charge and a return of 27%
with an expense ratio of 1.25%. Five percent better return is a huge
difference. Which one would you buy?


The Merrill Lynch Global Technology Fund with a back end
load of 4% and an expense ratio of 2.78% yielded 52% so far this year.
Another no-load fund, Profunds BioTechnlogy, with an expense ration of
2.92% and has made 56% YTD. Another no-brainer as to which one you
wished you had bought earlier this year.


Just a couple of more: Enterprise Growth Fund with a commission of
4.75%, an expense of 1.73% and a return of 20% YTD and Rydex Energy Fund
a no load with expenses of 1.39% and a return of 23% YTD.


Even if you leave out the commission charges you will
easily find funds that have returns in excess of those with lower
expense ratios. Don’t be fooled by Wall Street nonsense of anything but
net total return on your money. Period. If you take into account the
additional commissions that many funds and brokerage companies charge
you will quickly see you have been hoodwinked all these years.


The above examples are not extreme as I don’t think
expense ratios should mean anything to influence your purchase. Don’t
let any broker or financial planner sell you anything other than the
best return for your money.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.