Reason to Trade

Discussion in 'Wall St. News' started by ShoeshineBoy, Feb 23, 2009.

  1. Guys,

    If you want yet another reason to trade, look at the raping and pillaging in the mutual fund industry:

    How can people pay these kind of fees for such pitiful performance? I just don't understand my fellow humans sometimes. They think paying taxes is really wonderful and brings a great return to society and they think paying mutual fund advisors huge sums of money to underperform the market is an equally great idea.

    My advice: keep trading (or invest in an ETF)!
  2. Here's the top part of link:
    Most Profitable Mutual Funds Ever
    Friday February 20, 10:55 am ET
    By Max Rottersman

    HANOVER, NH ( - The highest mutual fund advisory fee, of all time, was collected from the Fidelity Magellan Fund (Nasdaq: FMAGX - News). In 2001 it took in $792 million. Magellan has earned the top three, all-time records, grossing $1.8 billion between 2000 and 2002. Much of that is profit, from future retirees who don't read their statements. Most can't believe such large sums go directly into one manager's pocket. After all, if they did, wouldn't we read about it in the press? No. Mutual fund companies provide a steady stream of advertising dollars. It isn't a conspiracy. It's natural self-interest for all involved, from The New York Times to the Wall Street Journal.

    Ironically, American mutual fund regulation is the finest in the world. I'm not joking. There's no secret to the numbers I'm pointing out. They're sent to every shareholder once a year. Sadly, few journalist read fund financial statements either. And any Fidelity shareholder who doesn't like the fees is free to leave.

    Mutual funds are corporations run on the behalf of their shareholders, represented by a board of trustees. It's a legal structure that makes for some confusing language; for example, fund fees are often called expenses (which legally they are), rather than fees (which functionally, you pay). For example, Fidelity never charges you, the shareholder, directly. Rather, the fund trust pays a fee, from the fund's assets, to various Fidelity companies (which are separate from the fund corporation) for various services. Your board of trustees enters into contracts, on the shareholder's behalf, with the advisor (like Fidelity) and other service providers. Ironically, mutual funds were born during a 'socialistic' time in American history. Again, I kid you not. Should shareholders revolt, trustees can easily fire the portfolio management companies which serve the funds. Interestingly, that has seldom happened.

    If you have any question about the profitability of the fund business, consider this. Last year, these five funds alone earned over $2 billion in advisory fees. Fidelity Contrafund: $522 Million (Nasdaq: FCNTX - News), PIMCO Total Return Fund: $506 Million (Nasdaq: PTTAX - News), Growth Fund Of America: $450 Million (Nasdaq: AGTHX - News), Europacific Growth Fund: $439 Million (Nasdaq: AEPGX - News), Fidelity Diversified International Fund: $374 Million (Nasdaq: FDIVX - News). Again, believe it or not, these are the fees the manager charges for a few people to pick stocks for the fund. The operational costs are separate.

    Flying under the radar, because they don't offer shares directly to the public, the CREF Stock Account Fund paid $586 million in advisory and administrative fees, the largest amount of any fund in my database. TIAA-CREF says it's 'at cost'. We have to assume it's true, that the teachers did their own homework and thought for themselves.

    Every shareholder should understand that all mutual funds have two basic costs. The first is the cost to manage the portfolio; that is, buy and sell stocks and bonds. A single person with a brokerage account can do this. In mutual funds, the fee for this 'portfolio management' work is called the advisory fee. The second basic cost is operational. This work is often done by hundreds of people: administrators, call center workers, accountants, IT professionals, custodians, printers and lawyers. The operational work is what shareholders 'see and touch' when they deal with their mutual fund. Shareholders seldom, if ever, have any contact with the portfolio manager (advisor).

    In 2001 Fidelity charged shareholders $162 million for operational costs (on top of the $792 million). Fidelity probably makes some money on these costs too, since Fidelity subsidiaries handle shareholder servicing, administration and other 'touch' services. Yet most people don't believe me when I say most of the advisory fee is profit. They just can't believe it's legal for Fidelity to collect $792 million for a few people picking stocks (which they pay a handsome salary in the millions, but it's a fraction of what they charge). Here's a list of 58 Fund Managers Who Took in Over $100 Million in Advisory Fees Last Year.

    Why is it so unbelievable? In the 1970s no one bought mutual funds. Everyone kept their money in banks and indirectly through pensions. Then all the money moved from bank accounts to mutual funds, to catch the technology revolution. Mutual funds were priced based on low-demand; that is, their margins were very high. As mutual funds grew they were sued to lower their costs (See the 'Gartenberg' case). But the effect was minimal.

    We must keep advisory fees in perspective. According to Sports Illustrated, Tiger Woods will collect about $127 million in 2008. Alex Rodriguez is expected to earn half a billion during his career. And to be fair to Fidelity, unlike Tiger Woods, they must funnel money into marketing. Yet the bottom line remains, that some mutual funds are wildly profitable, beyond the imaginings of people who began in the industry decades ago.

    Here is the top ten list since 1995. It's doubtful mutual funds will ever be so profitable again.

    Top 10 Highest Advisory Fee

    Grossing Funds

    Fund Year Advisory Fee

    Fidelity Magellan Fund 2001 710
    Fidelity Magellan Fund 2002 556
    Fidelity Magellan Fund 2000 554
    Fidelity Contrafund 2007 528
    Fidelity Contrafund 2006 461
    American Funds Growth Fund Of America 2007 455
    American Century Ultra Fund 2000 418
    Europacific Growth Fund 2007 387
    Fidelity Diversified International Fund 2008 382
    American Funds Growth Fund Of America 2006 370


    An important issue, overlooked by the media, is that most people are no longer hoping for the growth promised them in the 1980s or 1990s. They're in funds like Magellan, saving for retirement. Their needs changed, but the fund fees didn't. Economically, it may not be good for society to pay high fees to chase growth for its retirement accounts. Because portfolio managers can't beat indexes on a large scale (it's numerically impossible) most of the fees collected end up as a wealth transfer between savers and portfolio managers. And don't misunderstand me. This isn't a diatribe against Fidelity. Fidelity has also created the lowest fee index mutual funds (the Spartan Funds). This is a public policy issue that only the government can solve.

    But don't expect Obama to muddy the mutual fund waters anytime soon. He's already picked a politically savvy bureaucrat (read industry friendly executive) to run the SEC, even though it may not seem that way. Let me clarify. Despite being antiquated, our fund regulation is the best in the world. But that's due to the culture of the 1930s that took our financial market risks very seriously. Today's regulators, on the other hand, have long ago sold out to free-market malarkey. If we enter a real depression, it might change.

    In the past 10 years stock funds have taken in $21.4 billion in stock picking (advisory) fees. Imagine reading that social security had squandered that amount playing the stock market with social security money? A couple of years ago Republicans tried to push through private savings plans to replace social security. Fortunately, the public seems to recognize its own laziness and poor understanding of investment fees.

    The following is a list of the largest funds in 2003 and how much in advisory fees they collected in the most recent 10-year period. Keep in mind, these are just the fees for a few people to pick stocks. The money to do the shareholder work was part of additional fees.
  3. That's absolutely amazing. It's certainly not news that they measure fees by the boat load rather than in currency, but the figures are astounding.