SEC calculator helps uncover fee costs

Mutual Funds

Regulatory agency posts its formula on Web site for investors to do math

April 18, 1999|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

Like the instrument panel on an automobile's dashboard, mutual fund tables contain several gauges you should be watching as your money travels from Point A to Point B.

Short-term investment returns, like the speedometer, may grab your attention, but your journey becomes hazardous if you don't pay attention to the other dials.

Last week, the Securities and Exchange Commission posted on its Web site (http: // an easy-to-use calculator that, to stretch the auto metaphor, clearly explains the gauge known as the fund expense ratio and shows how mutual fund fees erode the mileage of your investment dollars.

For example, you might be attracted to the speedy-looking Van Wagoner Emerging Growth Fund, one of the top-performing equity funds in the first quarter.

Setting aside the fact that a simple index fund tracking the Standard & Poor's 500 index outperformed the Van Wagoner fund by a ratio of 3-to-1 over the past three years, you would be smart to look at the expense gauge.

Let's assume that over the next 10 years Van Wagoner's fund can perform as well as the 12 percent historic annual rate of return for equity mutual funds -- a middling result that the fund failed to achieve in the past three years. Now assume that the plain-vanilla Vanguard Index 500 fund also achieved a 12 percent annual return for the next 10 years.

If you put $10,000 in the Van Wagoner fund today instead of the Vanguard fund, you would be nearly $5,000 worse off -- you'd have $25,689.50, compared with $30,503.94 with Vanguard.

That outcome, quickly calculated by the SEC's new computer program, results solely from the fact that Van Wagoner's annual expense charge of 1.88 percent siphons money out of your account at a rate 10 times greater than the 0.18 percent annual expense charge at Vanguard.

If your investment destination over the next 10 years was $30,000, the hot Van Wagoner fund, which is at the top of the charts today, would leave you well short.

"What we wanted to do was to not take a position on whether an investor should buy a medium-, low- or high-priced fund but make it easier for people to comparison-shop," said Erik Sirri, director of the SEC's office of economic analysis. "It's not that easy a calculation. It requires some sophistication."

In particular, the SEC's calculator reveals with a few simple steps not only what fund fees cost you directly in dollars and cents but also the opportunity cost of not having the money you pay in expenses compounding at the investment rate you select.

A 10-year look at the Van Wagoner fund with a 12 percent assumed rate of return, for example, shows total fees paid at $3,338.84 and lost earnings due to fees of $2,030.14. The Vanguard fees total $350.35 and $204.20 in foregone earnings.

"Most of us, myself included, can't sit around the kitchen table one night and do the math calculations to figure out what these costs will add up to in the end," said Nancy Smith, director of the SEC's office of investor education.

Smith said investors without Internet access at home should be able to use the SEC fund cost calculator at local libraries equipped with personal computers. The reviews are thumbs-up, so far.

"I think it's well done, and I applaud their effort," said Don Phillips, president of Morningstar, the fund research organization.

"We think it's wonderful," said Heidi Stam, head of securities regulation at Vanguard Group. "The costs and impacts on returns over time are not well understood. The key concept is not just the costs but the foregone earnings."

You can't predict investment results for your fund, of course, but you can project the effect of expenses, which are disclosed in each mutual fund prospectus.

"Cost is just one factor, but to ignore it or misinterpret its significance is a critical mistake," Stam said.

The Investment Company Institute, the trade association for mutual funds, endorsed the SEC fund cost calculator. "I would have been thrilled to see someone in the fund industry do this," Sirri said. "But we haven't seen anything quite like it."

Phillips said the SEC should take the next step and require mutual funds' annual account statements to show clearly, in dollars and cents, what fund shareholders paid in the year just ended in fees and expenses.

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