Reported Returns... Do they include expense ratio

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Reported Returns... Do they include expense ratio

Postby caliskier » Thu May 02, 2013 12:28 am

I am trying to screen some bond funds but I assume this question applies to mutual funds as well. I am just starting to learn and I am working through Charles Schaub on my own. So here is my question. When I pull down funds to compare, I see average reported returns for 1,3,5 years and since inception. Then I see the Gross and Net expense ratio. Do those returns include the expenses? So in other words, if the net expense ratio is 1% and the reported average return is 10%, if I would have invested in this fund, is my return 9% or 10%?

I have surfed the web and the research I found seams to suggest my return would be 9%, but I called Schaub and got a very smart guy that explained it in detail to me that the returns they show are after all expenses are taken out so my return would be 10%.

But with all the heavy emphasis on having low fee funds I just am not sure what he is telling me is right. How does this work exactly.
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Re: Reported Returns... Do they include expense ratio

Postby nisiprius » Thu May 02, 2013 7:00 am

Yes, all reported returns are net of expenses. (One of the few things in the investment business that seems honest). The Schwab representative is correct. What you see is what you get--or, rather, what you see is what investors got. IF they stayed invested over the reported time period, of course.

Just to get you oriented. "Mutual funds" is the big category. Mutual funds may invest in bonds or stocks or both and in other things as well. "Bond funds" are mutual funds, mutual funds that invest in bonds. Traditionally mutual funds are "actively managed" (someone picks a portfolio of what they think are the best stocks). John C. Bogle, for whom this forum is named, created the first "index fund." Index funds are "passively managed" and track a mathematical average or index of all the stocks or bonds in some broad category, like "the total U. S. stock market."

If you run a fund screener or read articles about mutual funds or look at the funds in a typical 401(k), it looks as if the actively managed funds do succeed in beating the index funds, and, yes, the results are after expenses. A common phrase you will hear from people touting actively managed funds is "why would you care about expenses if you are getting higher returns after expenses?" The implication is something like this: the active fund managers can really do it, they can earn 2% or 3% above the index by choosing the best stocks, so even after they take a well-earned 1% for themselves, they are giving you another 1% or 2% or more.

Actively managed funds are going to be different from the index, some will do better, some will do worse. If you run a fund screener, then obviously you are going to find the ones that do better. If you read magazine articles, they are only going to talk about funds that have done better. If you look in your 401(k) plan, the plan managers usually remove funds that haven't done well and add new ones that have, so the fund is always full of four- and five-star funds. In other words, you are typically looking at active funds that have have good past performance. The thing that is really really really hard to believe but true is that past performance does not predict future results.

Another piece of phonus-balonus that you need to watch out for is manipulation of risk. It is usually possible to get higher performance by taking higher risk. Without having any real selection skill, a manager can pick categories of stocks that are more volatile than average. The result will be a mutual fund that rises faster than the market when the market is rising--but crashes farther than the market when the market crashes.
Last edited by nisiprius on Thu May 02, 2013 7:02 am, edited 1 time in total.
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Re: Reported Returns... Do they include expense ratio

Postby YDNAL » Thu May 02, 2013 7:01 am

caliskier wrote:I am trying to screen some bond funds but I assume this question applies to mutual funds as well. I am just starting to learn and I am working through Charles Schaub on my own. So here is my question. When I pull down funds to compare, I see average reported returns for 1,3,5 years and since inception. Then I see the Gross and Net expense ratio. Do those returns include the expenses? So in other words, if the net expense ratio is 1% and the reported average return is 10%, if I would have invested in this fund, is my return 9% or 10%?

I have surfed the web and the research I found seams to suggest my return would be 9%, but I called Schaub and got a very smart guy that explained it in detail to me that the returns they show are after all expenses are taken out so my return would be 10%.

But with all the heavy emphasis on having low fee funds I just am not sure what he is telling me is right. How does this work exactly.

Welcome, skier!

Have you seen the Bogleheads wiki ?
Link: http://www.bogleheads.org/wiki/Expense_Ratios

I suggest some reading before proceeding with your own investments at Charles Schwab.
Link: http://www.bogleheads.org/readbooks.htm
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Re: Reported Returns... Do they include expense ratio

Postby dickenjb » Thu May 02, 2013 8:26 am

Another thing to note is while the returns are net of fees, they are not net of taxes. If held in a taxable account, a lot of actively managed funds throw off huge cap gains every year leading to a lot of tax liability.

And looking at past returns is an extremely poor method of choosing funds.

Although I suspect we all did that when we were just learning. I know I did.
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Re: Reported Returns... Do they include expense ratio

Postby kenyan » Thu May 02, 2013 12:33 pm

The answer to your question is yes, as noted above. One additional note is that they generally do not include Loads, when applicable (which they aren't in your case). If you look up a Loaded fund on morningstar, the Load is ignored in the chart. If you look up that fund on the company's website, the Load is generally ignored unless you specifically click on an option to include the Sales Charge (at least, that's how it works in my wife's Terrible Plan).
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Re: Reported Returns... Do they include expense ratio

Postby caliskier » Fri May 03, 2013 1:22 am

thanks everyone
nisiprius wrote:Yes, all reported returns are net of expenses. (One of the few things in the investment business that seems honest). The Schwab representative is correct. What you see is what you get--or, rather, what you see is what investors got. IF they stayed invested over the reported time period, of course.

Just to get you oriented. "Mutual funds" is the big category. Mutual funds may invest in bonds or stocks or both and in other things as well. "Bond funds" are mutual funds, mutual funds that invest in bonds. Traditionally mutual funds are "actively managed" (someone picks a portfolio of what they think are the best stocks). John C. Bogle, for whom this forum is named, created the first "index fund." Index funds are "passively managed" and track a mathematical average or index of all the stocks or bonds in some broad category, like "the total U. S. stock market."

If you run a fund screener or read articles about mutual funds or look at the funds in a typical 401(k), it looks as if the actively managed funds do succeed in beating the index funds, and, yes, the results are after expenses. A common phrase you will hear from people touting actively managed funds is "why would you care about expenses if you are getting higher returns after expenses?" The implication is something like this: the active fund managers can really do it, they can earn 2% or 3% above the index by choosing the best stocks, so even after they take a well-earned 1% for themselves, they are giving you another 1% or 2% or more.

Actively managed funds are going to be different from the index, some will do better, some will do worse. If you run a fund screener, then obviously you are going to find the ones that do better. If you read magazine articles, they are only going to talk about funds that have done better. If you look in your 401(k) plan, the plan managers usually remove funds that haven't done well and add new ones that have, so the fund is always full of four- and five-star funds. In other words, you are typically looking at active funds that have have good past performance. The thing that is really really really hard to believe but true is that past performance does not predict future results.

Another piece of phonus-balonus that you need to watch out for is manipulation of risk. It is usually possible to get higher performance by taking higher risk. Without having any real selection skill, a manager can pick categories of stocks that are more volatile than average. The result will be a mutual fund that rises faster than the market when the market is rising--but crashes farther than the market when the market crashes.


Wow, thanks for the great reply, this really helped me, in fact I have a buddy of mine at work that i recruted to this forum today. I watched Jack Bogles PBS frontline show that got me all interested in index funds, so, i am definitly on board, studying everything. For bond funds i read that activly managed is better because the index takes the largest indebted institutions.
http://t.kiplinger.com/kiplinger/#!/ent ... d9d0b25662

You sound like you use swaub?

dickenjb wrote:Another thing to note is while the returns are net of fees, they are not net of taxes. If held in a taxable account, a lot of actively managed funds throw off huge cap gains every year leading to a lot of tax liability.

And looking at past returns is an extremely poor method of choosing funds.

Although I suspect we all did that when we were just learning. I know I did.


yes i am totally learning, getting stary-eyed by 18% returns on a 5 star activly managed bond fund.
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