Expenses Get Little Attention

Though they are often urged to pay close attention to the subject, mutual fund investors often behave as if expenses aren’t worth worrying about very much.

They pour money enthusiastically into many funds with relatively high expense ratios and management fees, as long as those funds produce respectable-or-better investment results.

Mindful of this, most funds compete almost entirely on the basis of performance, not costs. With a few exceptions from time to time, hardly anybody in the industry ever shows much inclination to challenge the Vanguard Group in Valley Forge, Pa., a longtime advocate of low-cost funds, for the role of prime penny-pincher.

This situation frustrates financial advisers, who lament that fund shareholders could get a better deal on costs if only they would make the effort to demand it.

But in the view of at least one observer, investors’ lack of interest in the issue isn’t so hard to understand, at least in the case of funds that invest in the domestic stock market. “The trouble with all this emphasis on expenses is that they are irrelevant for equity funds,” says Walter Frank in the semimonthly Moneyletter, a mutual-fund newsletter published in Baltimore.

For stock fund investors, Frank asserts, “expenses are NOT an issue in choosing a fund. Performance and risk are.”

Advocates of cost-consciousness usually start with the argument that, other things being equal, a low-cost fund will beat a high-cost fund every time. That’s because expenses for operating costs and paying the manager are deducted regularly from the assets of a fund, directly reducing its return to shareowners.

But “99 percent of the time other things are not equal,” Frank says.

To test his view, Frank says, he ranked domestic stock funds by their three-year performance records, and then checked to see if the ones with the better results had lower expenses. “There was zero correlation,” he reports. “Lower expenses were not related to higher performance, and vice versa.”

“Let us make clear that we are not talking about money funds, bond funds or other forms of fixed-income funds,” Franks adds. “For those funds expenses do make a difference.”