Please explain Mutual Fund "Cost of Ownership"

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Please explain Mutual Fund "Cost of Ownership"

Postby island » Tue Jul 23, 2013 3:35 pm

Hi All. Just discovered this forum a few weeks ago and just signed on today for the first time. I've been reading and learning so much, and really appreciate everyones expertise and willingness to take the time to share it. i realize it's time to get serious about investing rather than just living below means, maxing out 401Ks, putting $ in a taxable acount and letting it ride with barely a glance.....for years!

As part of my attempt to get serious husband and I went to a financial planner recommended by a coworker. Met for a few sessions of portfolio review at no cost and learned enough that I don't want to go back since I felt like I was being groomed to dive into Illiquid products like index annuities, non-publically traded REIT trusts and oil and gas investments. Not for me.

Anyway one of the things he did was run an "Investment Fee Audit" to show us the annaul "Cost of Ownership" of all our mutual funds across 4 accounts: both of our current 401Ks, the 401k my husband has with a previous employer, and our taxable account at American Funds. I know, AM = high loads, we were young and even more clueless when we bought those. He didn't explain the calculation and I didn't ask, figured I'd work it out when I got home, but I still don't understand where the numbers come from and a Goodle search didn't help me either.

I realize expense ration and turnover rate comes into play, and maybe other factors, but can someone please show me how it's calculated so I can work it out myself?

Here's 2 examples on the audit sheet from opposite ends of the spectrum regarding cost. I included all the info he has on the page. the first is in my 401k and the 2nd is in my husband's 401K from previous employer.

Vanguard Inst Total Stock Market Index VITPX
Total 1 year return: 17.23%
Total return annualized 5yr: 5.95%
Prospectus Net Expense ratio: .02%
Turnover Rate: 8%
Cost of ownership.12%
Mutual Fund Expense: $170.44
Mutual Fund Value: $146,926.99


PIMCO Total Return PTTAX
Total 1 year return: 7.20%
Total return annualized 5yr: 7.47%
Prospectus Net Expense ratio: .82%
Turnover Rate: 584%
Cost of ownership: 7.86%
Mutual Fund Expense: $7,254.96
Mutual Fund Value: $92,325.76


So with these 2 examples can anyone tell me how it's calculated?
Is it even accurate, useful info or just an exercise?
And are those expenses REALLY what's deducted from the value of the fund every year? If so, that $7,254.96 a year on the PIMCO shocked the heck out of me. That seems like a lot of cost for a little gain! Is that typical of bond funds? Is it worth it?

Incidentially my husband has the same PIMCO fund in hus current mutual fund, but I believe they're institutional shares, because the expense ration and turnover is less. Does that make sense?


Would appreciate any info you can provide on these cost of ownership stuff.

BTW husband will probably roll the old 401K into his current 401K because it appears to have similar quality funds with much lower expense ratios.
Don't want to roll into an IRA because we'd like to start Roth's thru backdoor conversions and don't want to kill the opportunity by coming up against the pro-rata rule. Don't qualify for a regular roth because of our income and the old 401K is 6 figures and would take a huge tax hit if we converted it to traditional IRA and then convert to Roth.


Thank you!
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Re: Please explain Mutual Fund "Cost of Ownership"

Postby Grt2bOutdoors » Tue Jul 23, 2013 4:16 pm

Hello and welcome to the forum!

Based on the net expense ratio you provided and account value - the Pimco fund would cost approximately $665.18 per year. I'm not sure where the $7K number is coming from, but that is excessively high. The calculation is the value of the account multiplied by the net expense ratio of .0072% - this is a rough estimate because the daily value of .0072/365 is taken based on the ending day value of the account, therefore, the true cost of the fund could be higher or lower, but it would not be drastically so as they purported in the example provided to you.

The cost of the Vanguard Institutional fund is even lower - $29.52 per year.
Not sure where the quoted figure is coming from.
"Luck is not a strategy" Asking Portfolio Questions
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Re: Please explain Mutual Fund "Cost of Ownership"

Postby dbr » Tue Jul 23, 2013 4:24 pm

It would appear that the cost of ownership they are giving you is the expense ratio plus an estimate of the fund internal trading costs derived from the turnover. Yes, those costs for management and for trading are deducted from your assets continually throughout the year. Amazing, isn't it? Also it is quite honest that they include the cost from turnovers, which is not generally published on fund data sheets.

A formula that is sometime estimated is that fund trading costs are about 1% for every 100% turnover. That would be 0.08% for TSM and 5.84% for the PIMCO to add to the ER. It is possible to extract the actual fund trading costs from fund annual reports and fund reports of supplemental information. Your advisor may have done that and gotten actual numbers. In any case the rough estimate method in not to far off, apparently.

A cost they do not show that could exist is a negative cost (income) from securities lending. I don't know how that runs typically.

In any case, fund costs are realized as actual costs after the fact. You are not charged estimates. That means you can only know the actual costs looking back.
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Re: Please explain Mutual Fund "Cost of Ownership"

Postby avalpert » Tue Jul 23, 2013 8:13 pm

dbr wrote:It would appear that the cost of ownership they are giving you is the expense ratio plus an estimate of the fund internal trading costs derived from the turnover. Yes, those costs for management and for trading are deducted from your assets continually throughout the year. Amazing, isn't it? Also it is quite honest that they include the cost from turnovers, which is not generally published on fund data sheets.

You may be giving them to much credit - it may not be that honest if the alternatives they are offering are illiquid alternative investments that don't have large turnover but other hidden costs he may not be comparing.
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Re: Please explain Mutual Fund "Cost of Ownership"

Postby Duckie » Tue Jul 23, 2013 11:21 pm

island, you can look this up yourself. Check out the "Fees & Expenses" box of the two funds below. Compare the fund costs with the "Category Average". Be aware that funds in retirement accounts often have different expense ratios than "retail" funds so it won't be exactly the same.

(VITPX) Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares (0.02%)
(PTTAX) PIMCO Total Return Fund A Class (0.85%)

In general, a lower cost fund is better. Try this Expense Ratio Calculator to compare costs.
  1. Click on the "I have read the disclaimer" box.
  2. Amount invested - 10,000
  3. Annual return - 3
  4. Projected expense ratio is - .85 (PIMCO Total Return)
  5. What if the expense ratio is - .10 (Vanguard Total Bond)
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Re: Please explain Mutual Fund "Cost of Ownership"

Postby island » Fri Jul 26, 2013 11:42 am

This newbie just found how to keep track of posts, so sorry for the delayed reply and thank you, for the welcome and great info. This is a terrific forum!

Grt2bOutdoors- I was under the assumption the cost to me was similar to what you posted, that it was all about the expense ratio, at least for these no load, no 12-b-1 fee funds, 401K funds, but I guess it was the wrong assumption. There seems to be way more than the expense ratio, but I don't know what, and that's why I was questioning where the much higher "cost of ownership" $ came from. Looks like DPR had the answer.....

Dbr- Thanks for the eye opening info, as painful as it is. I'm still shocked to think that PIMCO fund sucked up over 7K in fees in 1 year for the least gain, in my 401K no less, and I was totally clueless to it. Maybe I was better off clueless, because it looks like there is no way around it. The price of admission. I'm pretty sure the advisor didn't look it up in the fund prospectus or disclosures, because he said it was based on a standard calculation that most professionals (or those in the know?) use. I'm curious to read the "fine print" myself at least once anyway. I thought the new laws about disclosure would show this, but when I looked at the ones I received for my funds, they just brought attention to the expense ratio which seemed pretty easy to find if you looked for it. No other details though. Why can't they just tell us in dollars what we paid in fees every year?

Avalport- Your right, I don't think the advisor drawing our attention to the cost of ownership had anything to do with honesty, because he didn't sell or invest any of stuff we have now. He thought my husband's 401K from his previous employer would be perfect for some of the illiquid investments he had in mind and I'm pretty sure he thought exposing the unknown costs of those would loosen our grip on that 300K account. He called it the "low hanging fruit" that could be earning much more. Yeah for him maybe! Seems like everyone loves to get their hands on an old 401K. I will give him credit for educating me just enough to realize I need to learn much more and never return there.

Duckie- Thanks for the link to that calculator which will come in handy, but it doesn't apply to the question I had. I wasn't comparing those funds, just providing 2 examples to see if anyone could explain what the cost of ownership $ was based on, in addition to the ER.

Thanks again all. If anyone has any other thoughts or simple math to share, would love your input!
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Re: Please explain Mutual Fund "Cost of Ownership"

Postby grabiner » Sat Jul 27, 2013 12:22 am

For an index fund, you can get a good idea of the total cost of ownership from the difference between the index fund returns and the index returns. Over the last 10 years, Institutional Total Stock Market Index earned 8.07%, and its index earned 8.08%, so the fund management and other costs were only 0.01%, less than the 0.04% expense ratio.

(Negative costs can occur for a variety of reasons, such as efficient trading strategies and income from lending stock to short-sellers.)
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