On Mon, 22 Nov 2004 09:28:29 CST, beliavsky[at]aol.com wrote:

- quote -

For the non-academics amongst us who read this <grin> , a little
translation might be helpful.

1. Who pays this higher cost, and how?

2. What are the odds (short- and long-term) that the higher costs
will be compensated for by proportionately higher returns?

3. What options (to the higher costs) would a cost-averse investor
have?


-HW "Skip" Weldon
Columbia, SC

Published mutual fund expense ratios do not include trading costs,
such as
(1) commissions
(2) bid-ask spread
(3) market impact (a fund with a million shares to buy will pay more
for the last 10,000 than the first 10,000).

A recent study by the Zero Alpha Group, discussed on page C17 of the
Nov 22, 2004 Wall Street Journal, examines the size of trading costs.
Here is an excerpt from
http://www.zeroalphagroup.com/headli...udy111704.html . The
full study is at http://www.zeroalphagroup.com/headli...ov_15_2004.pdf
.. Knowing the total expense ratio of an actively managed fund should
help an investor evaluate it against the alternative of index funds
and buying stocks directly.

"Conducted by Edward O'Neal, assistant professor of finance at the
Wake Forest University Babcock Graduate School of Management, and
Jason Karceski and Miles Livingston at the University of Florida, the
ZAG study looks at more than 5,000 domestic equity funds and finds
that trading costs were, on average, 43.4 percent as large as reported
mutual fund expense ratios. For many mutual funds, these costs of
trading exceed stated expense ratios. According to the study: "46
percent of all small cap funds have "all-in" trading costs that are
higher than the annual expenses investors pay. 21 percent of mid cap
funds fall into that category as do 7 percent of all large cap funds.
In the small-cap category, 17 percent of all funds have implicit
trading costs that are twice the level of annual expenses."

The ZAG study, which is entitled "Portfolio Transactions Costs at US
Equity Mutual Funds" also concludes that growth funds have higher than
average trading costs as a percent of annual expenses: The growth
funds are broken down into large cap growth (with trading costs
averaging 43.1 percent of stated expense ratios), mid-cap growth (86.0
percent), and small-cap growth (123.2 percent). Hidden expenses for
value funds are lower than with growth funds, the study found."