Expense ratio, turnover ratio, taxes vs fund performance

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Biggie55
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Expense ratio, turnover ratio, taxes vs fund performance

Post by Biggie55 » Sat Jan 13, 2018 5:39 pm

:beer

I need some clarification on total costs of a mutual fund.

I mostly use vanguard index funds funds in my 457, HSA, 529 and DAF accounts.... yet...

I also have a small percentage in funds like the fidelity contrafund and the TRow price growth stock inv funds.

If the expense ratios are already included in the average annual rate of return and turnover expenses are also included in the rate of return and taxes are not a factor until I retire (I might be wrong on these facts) but shouldn't rate of return include the net value of the fund after all expenses are accounted for?


Would it be wise to hang onto these funds if their rates of return since inception have been 12.54% since 1967 with ER of .68% for F contrafund.

Or TRow price growth stock inv 11% since 1950 with ER of of .68%.

Thanks in advance 😊

krow36
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by krow36 » Sat Jan 13, 2018 10:03 pm

Ahhh, Contrafund! Yes it has outperformed Vanguard’s Growth Index fund over 1 and 3 years. Over 5 and 10 years, Growth Index has done about as well. Look up Growth Index on Vanguard’s website and use Compare to check it out vs Contrafund. And also vs TRP Growth Stock.
https://personal.vanguard.com/us/funds/ ... tingFrom=2
Who knows if Contrafund will continue its outperformance? It has a number of fans among Bogleheads as you can confirm by using the BH search function. Yes, TRP Growth Stock has been outstanding. What other funds with outperformance and underperformance are you using? Do some of them underperform the comparable Vanguard index fund? :wink:

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arcticpineapplecorp.
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by arcticpineapplecorp. » Sat Jan 13, 2018 10:53 pm

Welcome to the group.

Expense ratio and turnover are important considerations. But there are a couple of other things to consider that you haven't mentioned:

1. manager risk
2. portfolio composition (amount of diversification)

The contrafund (and trowe price growth stock fund) are both actively managed funds. What that means is that you're taking manager risk that you don't take when you invest in an index fund. We can always look at different charts that either make a fund look great (or not). In the case of contrafund it's beaten the S&P500 back to 8/1/76 (S&P500's inception) handily:

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

but wait, it didn't really start pulling ahead of the S&P500 until around the end of 1990 (or beginning of 1991). What happened then? Well, that's when the fund got it's new manager: William Danoff (manager since 9/17/1990 source: https://fundresearch.fidelity.com/mutua ... /316071109). So we can certainly give Mr. Danoff the credit since then for beating the S&P500. But you see the problem, right? What happens when Mr. Danoff stops being the manager? How do you know the next manager will outperform the S&P500 like Mr. Danoff did? How will you know when Mr. Danoff retires and someone else takes over? You'll be in uncharted waters then. Not to mention the fact that the past is not prologue. Just because Mr. Danoff did beat the S&P500 in the past, doesn't mean he'll continue to do it again (as in, in the future). Case in point (I'm cherry picking here to make a point) let's see how Mr. Danoff did against the S&P500 over the past 7 years:

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Basically been a tie, hasn't it? Would you continue to believe in Mr. Danoff's stock picking abilities against an index fund like the S&P500 over the next 7 years when he hasn't beaten it over the past 7 years?

So there's manager risk. You don't have that risk when you own the market (the S&P500 is not "the market" but it's about 80% of the market).

Second point I mentioned--portfolio composition.
The contrafund has 342 stocks in the portfolio. If you owned the total stock market index fund you'd own 3624 stocks (even the S&P500 index fund has 508 companies). So a fund that has less companies is less diversified. The contrafund is mostly a US fund but does have 6.7% international stocks. You could further diversify with a total international fund (index) which invests in 6267 stocks, the combination of that and total US (3624 stocks) would give you 9891 stocks in total. That's diversification which the contrafund does not offer.

The T Rowe price growth stock fund only has 101 stocks (source: https://www3.troweprice.com/fb2/fbkweb/ ... cker=PRGFX). That's not great. And the manager of that fund, Joe Fath has only been the manager since 1/6/14 so not that long at all. (source: https://www3.troweprice.com/fb2/fbkweb/ ... cker=PRGFX)

The TRowe price fund (prgfx) underperformed the S&P500 going back to 8/1/76:

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

The costs are less with index funds. You generally get to keep what you don't pay for.

What do you think?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

dbr
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by dbr » Sun Jan 14, 2018 10:21 am

Biggie55 wrote:
Sat Jan 13, 2018 5:39 pm

If the expense ratios are already included in the average annual rate of return and turnover expenses are also included in the rate of return and taxes are not a factor until I retire (I might be wrong on these facts) but shouldn't rate of return include the net value of the fund after all expenses are accounted for?
I don't know about "should" but in fact the NAV of the fund does include all net expenses so what you see is what you get and that is also what is published. Note funds can have sources of income as well such a stock lending and certain purchase or redemption fees that have been charged. Loads and other sales expenses are not in the return but could affect what the investor actually gets.

livesoft
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by livesoft » Sun Jan 14, 2018 10:28 am

Biggie55 wrote:
Sat Jan 13, 2018 5:39 pm
Would it be wise to hang onto these funds if their rates of return since inception have been 12.54% since 1967 with ER of .68% for F contrafund.

Or TRow price growth stock inv 11% since 1950 with ER of of .68%.
It would be wise to have a Time Machine and go back to 1950 and 1967 invest. But surely if you had a Time Machine, then you could find something even better to invest in than these two funds, right?

So that's a problem with using historical performance to make decisions: You cannot go back.
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grabiner
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by grabiner » Sun Jan 14, 2018 2:58 pm

In a tax-deferred account, turnover is not relevant to tax cost, as you don't pay any taxes until you withdraw, and then pay tax on the full balance (traditional) or not at all (Roth).

Turnover does have a slight negative effect on fund performance, because of transaction costs. If a fund holds a million shares of stock which last traded at $100, and wants to sell them, it will probably drive the price down in the process, and get a bit less than $100M.
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Biggie55
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by Biggie55 » Wed Jan 17, 2018 1:49 pm

krow36 wrote:
Sat Jan 13, 2018 10:03 pm
Ahhh, Contrafund! Yes it has outperformed Vanguard’s Growth Index fund over 1 and 3 years. Over 5 and 10 years, Growth Index has done about as well. Look up Growth Index on Vanguard’s website and use Compare to check it out vs Contrafund. And also vs TRP Growth Stock.
https://personal.vanguard.com/us/funds/ ... tingFrom=2
Who knows if Contrafund will continue its outperformance? It has a number of fans among Bogleheads as you can confirm by using the BH search function. Yes, TRP Growth Stock has been outstanding. What other funds with outperformance and underperformance are you using? Do some of them underperform the comparable Vanguard index fund? :wink:
Thank you for taking the time to reply. I figure I'll keep the contrafund for another year as well as the TRP Growth stock since those and the oppenheimer global fund are the only non vanguard funds I own.

The rest are all VAN SM cap, VAN MD cap,Van 500 Index Admiral Funds and Van International Growth Fund Investor Class

Biggie55
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by Biggie55 » Wed Jan 17, 2018 1:51 pm

grabiner wrote:
Sun Jan 14, 2018 2:58 pm
In a tax-deferred account, turnover is not relevant to tax cost, as you don't pay any taxes until you withdraw, and then pay tax on the full balance (traditional) or not at all (Roth).

Turnover does have a slight negative effect on fund performance, because of transaction costs. If a fund holds a million shares of stock which last traded at $100, and wants to sell them, it will probably drive the price down in the process, and get a bit less than $100M.
Good to know that short term capital gains or long term capital gains taxes are not a factor until I would draw from the fund after retirement.

Thank you kindly for your time.

Biggie55
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Re: Expense ratio, turnover ratio, taxes vs fund performance

Post by Biggie55 » Wed Jan 17, 2018 1:57 pm

livesoft wrote:
Sun Jan 14, 2018 10:28 am
Biggie55 wrote:
Sat Jan 13, 2018 5:39 pm
Would it be wise to hang onto these funds if their rates of return since inception have been 12.54% since 1967 with ER of .68% for F contrafund.

Or TRow price growth stock inv 11% since 1950 with ER of of .68%.
It would be wise to have a Time Machine and go back to 1950 and 1967 invest. But surely if you had a Time Machine, then you could find something even better to invest in than these two funds, right?

So that's a problem with using historical performance to make decisions: You cannot go back.
You're right , If only I had a time machine or crystal ball. Yet, I do think that a past performance should be considered if a fund has outperformed an index with similar risk taken. Especially if it has been the case over a long period of time. Either way, thank you for your feedback. Most of my funds are VAN index funds and I love them.

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