Measuring a high-fee fund’s effectiveness

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
tominsc
Posts: 55
Joined: Wed Dec 30, 2020 12:25 pm

Measuring a high-fee fund’s effectiveness

Post by tominsc »

I’m looking at our portfolio in Morningstar’s portfolio analysis tool, which I like a lot. Right now, I’m thinking about to evaluate the fees each of our funds are costing us, vs the performance to date.

I’m well aware prior performance does not guarantee yada yada yada.

At the moment here’s what I’m thinking about.

We’ve got a healthy chunk in Tweedy Browne Global Value, which is our only non-Vanguard fund. M* estimates it’s costing us a bit over $1,250 a year in fees. Its expense ratio is about 1.35%. Right now, those fees alone are about half of all the fees M* estimates our whole portfolio is costing us. Vanguard Total Intl Stock’s expense ratio is about 0.11%. But to date (I know, I know…) TBGVX has outperformed VTINX by about 10% to about 6%. 10% vs 6% is about a 66% improvement. 10=6+2/3 of 6.

So my Q: is there any measure of a fund’s performance vs the fee it costs you, that I could use as one way of helping me decide if I’m getting the bang for my buck that I’d like if I stay with TBGVX? Is Sharpe Ratio relevant? I forget exactly what that is. What about alpha?

Obviously, in the end, my gut is my best tool but I’m still curious about other ways of doing what I’d like to do.

To repeat my earlier stmt: I’m NOT asking or beginning a thread on prior performance vs future expectations for either fund. The figures I’m using here aren’t my point. I’m only asking a general question about tools to help evaluate a fund’s effectiveness given its expense ratio.
User avatar
warowits
Posts: 478
Joined: Tue Sep 29, 2015 2:38 am

Re: Measuring a high-fee fund’s effectiveness

Post by warowits »

A more appropriate comparison would be TBGVX to VTRIX (Vanguard int. value).
Topic Author
tominsc
Posts: 55
Joined: Wed Dec 30, 2020 12:25 pm

Re: Measuring a high-fee fund’s effectiveness

Post by tominsc »

Yeah I know. I used the wrong ticker. VTIAX is the right ticker for the particular Vang intl fund I had in mind.

OTOH, that’s not my point. My point, as I tried to say twice in the OP, is only to ask what financial analysis tools are there, if any, to measure any fund’s performance vs the fees it costs the investor? My question really has nothing at all to do with particular funds, even though I did put the question in the context of what I do happen to own. I still only want to know how to measure the effectiveness of any fund’s expense ratio vs the performance it gives me.
sycamore
Posts: 2049
Joined: Tue May 08, 2018 12:06 pm

Re: Measuring a high-fee fund’s effectiveness

Post by sycamore »

Morningstar itself in 2016 said that the fee itself can be used to predict success or failure.
https://www.morningstar.com/articles/75 ... or-failure

Later in 2020, the same author went beyond that and said
All this is important because fees are the best predictor of mutual fund success. I've found that every time I tested the thesis
So a fund's fees can be used to compare that fund to other funds in the same category. This is perhaps an indirect answer to the question you're asking. M* may provide this information, like which "fee quadrant" is a fund in. Also, I'm not sure if you need to be a subscriber to get that info.
User avatar
mrspock
Posts: 1574
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Measuring a high-fee fund’s effectiveness

Post by mrspock »

In my view, the simple answer is: you can’t. Which is the entire problem of active management.

Even if they did well in the past, there’s not guarantee it will continue, even style boxes can change under new management. And means for assessing if the methods used are “durable” will usually be hampered due to lack of access to the managers or “proprietary” trading methods.

If your gain is in tax advantaged, it’s a no brainer to me to sell. If in taxable, you are left will making your best guess. If it’s a good chunk of your portfolio (I.e. represents a lot of risk) or your investment horizon is longer, it’s probably best to sell even then.

My only caveat, would be if in taxable and you could confirm the fund is a closet indexer and/or has “Wellesley” fund like durable discipline/transparency then it might be ok to hang on to it.
User avatar
warowits
Posts: 478
Joined: Tue Sep 29, 2015 2:38 am

Re: Measuring a high-fee fund’s effectiveness

Post by warowits »

tominsc wrote: Sun May 02, 2021 12:31 pm Yeah I know. I used the wrong ticker. VTIAX is the right ticker for the particular Vang intl fund I had in mind.

OTOH, that’s not my point. My point, as I tried to say twice in the OP, is only to ask what financial analysis tools are there, if any, to measure any fund’s performance vs the fees it costs the investor? My question really has nothing at all to do with particular funds, even though I did put the question in the context of what I do happen to own. I still only want to know how to measure the effectiveness of any fund’s expense ratio vs the performance it gives me.
In my opinion the best tool is an appropriate benchmark, which VTRIX is (Foreign Large Cap Value Index). Asking if the fees for TBGVX were worth it in a vacuum is tough. Knowing it is a Foreign large cap value fund helps us figure out if they did a good job stock picking, or if they just happened to be in a hot or cold sector of the market. Using that as a benchmark (and a perf chart) it seems like they have done better than the passive index in that sector over the last ten years or so. You would have to spend more time looking under the hood to determine if that might really be skill. Perhaps they just cheated and invested 10% of the fund in US tech companies and that explains their entire outperformance.
Makefile
Posts: 717
Joined: Fri Apr 22, 2016 11:03 pm

Re: Measuring a high-fee fund’s effectiveness

Post by Makefile »

Doesn't the Morningstar star rating take into account a "risk-adjusted return" which sounds like what you're going for?
https://www.morningstar.com/content/dam ... dology.pdf
ralph124cf
Posts: 2683
Joined: Tue Apr 01, 2014 11:41 am

Re: Measuring a high-fee fund’s effectiveness

Post by ralph124cf »

There are two market sectors that I want active management for. I think that trying to do index funds for these sectors is not smart.

The sectors are Emerging market small cap, and Gold mining stock funds.

Both of these sectors have long records of fraud. In the case of gold mining, the record of fraud goes all the way back to ancient Egypt. I want the fund to send a mining engineer and a lawyer to go to what may be a third world country to verify that the company exists, owns the land that the mine is on (or has the right to mine on public land), and that a mine exists. I want the engineer to go into the mine and verify that gold bearing ore is being mined, and how many grams of gold per ton the ore assays at.

Ralph
User avatar
firebirdparts
Posts: 2467
Joined: Thu Jun 13, 2019 4:21 pm

Re: Measuring a high-fee fund’s effectiveness

Post by firebirdparts »

ralph124cf wrote: Sun May 02, 2021 7:48 pm There are two market sectors that I want active management for. I think that trying to do index funds for these sectors is not smart.

The sectors are Emerging market small cap, and Gold mining stock funds.

Both of these sectors have long records of fraud.
Ralph
I agree entirely. I don't even have a gold miners fund, but I am holding the "pinwheel" so I do buy EM, and I thought why not make it EM SC. Clearly there is a lot to worry about going on there, and the active managers might get fooled, but there is a lot of room for economic growth too.

There's no way I'd buy a 3rd world bond index fund either, but I don't have anything like that anyway.
A fool and your money are soon partners
okwriter
Posts: 28
Joined: Mon Apr 12, 2021 2:00 pm

Re: Measuring a high-fee fund’s effectiveness

Post by okwriter »

warowits wrote: Sun May 02, 2021 2:22 pm
tominsc wrote: Sun May 02, 2021 12:31 pm Yeah I know. I used the wrong ticker. VTIAX is the right ticker for the particular Vang intl fund I had in mind.

OTOH, that’s not my point. My point, as I tried to say twice in the OP, is only to ask what financial analysis tools are there, if any, to measure any fund’s performance vs the fees it costs the investor? My question really has nothing at all to do with particular funds, even though I did put the question in the context of what I do happen to own. I still only want to know how to measure the effectiveness of any fund’s expense ratio vs the performance it gives me.
In my opinion the best tool is an appropriate benchmark, which VTRIX is (Foreign Large Cap Value Index). Asking if the fees for TBGVX were worth it in a vacuum is tough. Knowing it is a Foreign large cap value fund helps us figure out if they did a good job stock picking, or if they just happened to be in a hot or cold sector of the market. Using that as a benchmark (and a perf chart) it seems like they have done better than the passive index in that sector over the last ten years or so. You would have to spend more time looking under the hood to determine if that might really be skill. Perhaps they just cheated and invested 10% of the fund in US tech companies and that explains their entire outperformance.
Looked up TBGVX and it's a global value fund, not foreign value. It currently has 10% invested in US companies. So 90% VTRIX (foreign value) + 10% VVIAX (US value) may be a better benchmark. However, its fact sheet does not state any limit on how many US holdings it can have, which makes this difficult.
Post Reply