Re: Mutual fund expenses - how to calculate ER and return?

[porcupine]

Let's say I run a mutual fund empire comprising of just one mutual fund ZZZZX, the Sleep Well Fund.

In January, AXYZ, 10,000 shares of ZZZX were outstanding, and the assets (cash + market value of stock holdings) added up to $10,000,000. Obviously, the share price was $1,000 per share of ZZZZX.

During the course of the year AXYZ, here was all the money I spent:

Advertising: $10,000
Fees charged by middleman brokers and brokerages: $10,000
Research and travel for my employees: $10,000
Salaries of my employees (and myself): $40,000
Management fee, which I have sole decision making ability as to who to give it to: $10,000 (i.e., 0.01%)
Office rent, supplies, etc: $10,000
Trading fees (buying and selling stocks): $10,000

Also, in AXYZ, I managed to sell 10,000 more shares of ZZZX. Let's assume no dividends, no distributions, etc.

On December 31, AXYZ, there are now 20,000 shares of ZZZX that are outstanding and the assets (cash + market value of stock holdings) add up to $30,000,000. Obviously, the share price was $1,500 per share of ZZZZX.

What is the expense ratio for the fund (please add any other hypothetical data which is missing above, or document any conclusions you needed to make to get this figure)?

What is the annual return for this mutual fund? To make the calculation easy, let's assume that the 10,000 shares were sold at 9:30 am on January 1, AXYZ (what a waste of advertising for the whole year! ).

- Porcupine

[FNK]

The question is which periods are used to account for ER. The answer is I don't know, but I would guess it's either the trailing year's expenses or the budgeted expenses for the coming year, divided into current assets. 0.33% in your example.

[porcupine]

The question is which periods are used to account for ER. The answer is I don't know, but I would guess it's either the trailing year's expenses or the budgeted expenses for the coming year, divided into current assets. 0.33% in your example.

FNK:

Here is my question - given all the information in the original post, for the period from 1/1/AXYZ to 12/31/AXYZ, what was the expense ratio of my fund and what was the return?

- Porcupine

[porcupine]

*Bump*

Is this in the wrong forum, or have I asked the question incorrectly?

I really am trying to figure out how exactly a fund's ER is calculated. For the longest time, I had the understanding that the ER included all the 'out of pocket' expenses associated with mutual funds and, for instance, the only reason why a fund with high turnover was to be avoided was because it would increase the costs (i.e., ER) of ownership. But I have read folks here say that transaction fees are hidden/transparent to the investor. So, I listed out all of the costs (that I thought) a fund company would have, to see if I could understand which of those show up in the statements and which do not.

Either way, I would assume that the fund company makes sure that all of its expenses are covered by the consumers/investors! That said, the one response that I got from FNK indicates that most of the expenses are hidden from the investor. And I don't understand his calculation either!

- Porcupine

[dbr]

I am not an expert at how the internal bookkeeping of a fund is done, but will take a whack at your categories:

Advertising: $10,000

I don't know when this could be charged to a fund as distinct from the books of the company offering a family of funds and other services. It it were charged to a fund one would think it would be in the ER.

Fees charged by middleman brokers and brokerages: $10,000

This must certainly be charged to the fund and not reported in the ER. Maybe there is some distinction between this and trading fees below? -- or not?

Research and travel for my employees: $10,000
Salaries of my employees (and myself): $40,000
Management fee, which I have sole decision making ability as to who to give it to: $10,000 (i.e., 0.01%)

Wouldn't all of these be management fees and charged to the fund and appear in the ER? Otherwise some of the above might be on the books of the company and not of the fund.

Office rent, supplies, etc: $10,000

I think this is apportioned to funds as management and administrative and in the ER.

Trading fees (buying and selling stocks): $10,000

Definitely a fund cost and definitely not in the ER (but see above about fees).

A further category you didn't list is income from security lending which is a negative cost and not in the ER, as I understand.



- Porcupine

[umfundi]

Pick a mutual fund symbol and look for the data at Morningstar. They have good explanations on how all the metrics are calculated.

Keith

[dbr]

Pick a mutual fund symbol and look for the data at Morningstar. They have good explanations on how all the metrics are calculated.

Keith

Even better, one might study the fund prospectus, the fund annual report, and fund report of supplementary information. As an example it is possible to find trading costs in the annual report, I believe. Data may not be reported in the categories in the OP, but the total may be complete.

[umfundi]

Pick a mutual fund symbol and look for the data at Morningstar. They have good explanations on how all the metrics are calculated.

Keith

Even better, one might study the fund prospectus, the fund annual report, and fund report of supplementary information. As an example it is possible to find trading costs in the annual report, I believe. Data may not be reported in the categories in the OP, but the total may be complete.

True,

But I was suggesting Morningstar would tell you how the numbers are calculated, rather than the numbers for any particular fund.

Keith

[porcupine]

Let's say I run a mutual fund empire comprising of just one mutual fund ZZZZX, the Sleep Well Fund.

In January, AXYZ, 10,000 shares of ZZZX were outstanding, and the assets (cash + market value of stock holdings) added up to $10,000,000. Obviously, the share price was $1,000 per share of ZZZZX.

During the course of the year AXYZ, here was all the money I spent:

Advertising: $10,000
Fees charged by middleman brokers and brokerages: $10,000
Research and travel for my employees: $10,000
Salaries of my employees (and myself): $40,000
Management fee, which I have sole decision making ability as to who to give it to: $10,000 (i.e., 0.01%)
Office rent, supplies, etc: $10,000
Trading fees (buying and selling stocks): $10,000

Also, in AXYZ, I managed to sell 10,000 more shares of ZZZX. Let's assume no dividends, no distributions, etc.

On December 31, AXYZ, there are now 20,000 shares of ZZZX that are outstanding and the assets (cash + market value of stock holdings) add up to $30,000,000. Obviously, the share price was $1,500 per share of ZZZZX.

What is the expense ratio for the fund (please add any other hypothetical data which is missing above, or document any conclusions you needed to make to get this figure)?

What is the annual return for this mutual fund? To make the calculation easy, let's assume that the 10,000 shares were sold at 9:30 am on January 1, AXYZ (what a waste of advertising for the whole year! ).

- Porcupine

Using the knowledge I have gleaned from the responses to this thread and the other one on Expense Ratios, let me try to answer my own question!

Total expenses to be included in the ER = $80,000
- advertising = $10,000
- management fee = $10,000
- research and travel for my employees = $10,000
- salaries = $40,000
- office rent, supplies, etc = $10,000

Hidden with the fund and invisible to the investor:
- trading fees = $10,000

The 12b-1 fees:
- fees charged by middleman brokers and brokerages = $10,000

One final question - when calculating the percentage for the calendar year AXYZ (which is also the fiscal year for this fund), would you divide by the initial balance (as of 1/1/AXYZ) or the final balance (12/31/AXYZ) in the fund?

Also, I need to make a small correction: though the value of the underlying stock would've increased the balance to $30,000,000 - the expenses listed above would've to come from that balance. So, I'd need to sell about $100,000 worth of the underlying securities to pay the expenses during the year. $9,900,000 increase on an initial investment of $20,000,000 is the performance of the fund ZZZZX. Not bad, eh?

- Porcupine

PS: Obviously, I am assuming that I run only one mutual fund in my empire and so all my expenses have to be borne by it!