Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Thursday, December 29, 2005

Mutual Funds and MERs

Recently, I attended a social gathering where there were several fund managers for a firm that sells mutual funds. I commented with some question about the high management expense ratios [MERs] for their product and expressed a preference for passive, index-based funds with very low MERs (as I recall, this was after one of my acting gigs, and they knew me as an actor, not as an economist).

Their response was,

What does the "M" in MER stand for?
Management! We manage the fund so it does better.
I don't believe them. On average, especially in well-developed markets like the US markets, index funds tend to outperform managed funds, especially once all the fees are taken into account.

Now there is a calculator/analyzer available to help assess the fees and expenses involved with mutual funds. According to the Washington Post [reg. req'd]:
The online tool now contains up-to-date fee and expense information on practically all of the more than 18,000 mutual funds and 160 Exchange Traded Funds (ETFs)...

More than 50 million American households have money in mutual funds. What NASD has done is to go beyond just telling investors they need to scrutinize fees and expenses before investing in mutual funds. The regulator has provided a much-needed tool to help people put that advice to action.
Although Jeff Cosford has sent me some evidence that counters the theory, I still, in my blissful and rational ignorance, subscribe fairly strongly to the Efficient Markets Hypothesis.
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