Given recent discussions of implicit fund costs and their effects on retirement plan participants (see this for our latest take on the topic), this report from last week's Morningstar conference is very timely indeed:
He and Roger Edelen, assistant professor at the University of California, Davis Graduate School of Management, spoke today at Morningstar's annual investment conference in Chicago.
"Some funds have a high hurdle to overcome because of the costs," Mr. Edelen said. "This doesn’t mean that active management is dead; it just means that they have a [high] hurdle to overcome."
Mr. Edelen said commission costs pale in comparison with the costs that are added by trading, particularly when fund managers buy stocks because they have an added supply of cash.
He said trading costs add up because managers start to buy a stock one day and continue to buy that same stock for several days.
By the time they've finished purchasing the stock, they have driven up the price of the stock, and it is much more expensive than it was when they first bought it, Mr. Edelen said.
We don't know what to make of Lisa Shidler's use of "commission costs" here. Is she referring to sales loads? Expense ratios? Either way, the basic truth remains: Implicit costs affect investors' returns, and understanding the factors that drive those costs higher--portfolio turnover, fund cashflow, asset-class liquidity, fund size--is an important part of establishing and maintaining an excellent investment program.
We'll look for more details on the Dutta-Edelen research and pass them along if we come up with anything.
Lisa Shidler, "Trading costs on mutual funds outweigh commission fees for investors, experts say," Investment News, May 29, 2009