FundVision Classic Collection - Roger's

Author: Roger

But then again, maybe I am. Thanks for the thoughtful and thorough answer reply to my assertions that "a redemption is a redemption" and that costs are not related to length of ownership. If I had chosen my terms more prudently, I would have stated “the cost to a fund (or broker) of a single round-turn transaction (fund or equity) is the same regardless of the length of time of between opening and closing of the position".

You listed a number of costs associated with transactions. But remember, even though you mixed them all together, costs fall into one of two categories, recurring expenses or fixed (non-recurring) expenses. By definition, the short-term (ST) trader and the B&H investor both create exactly the same fixed expense (acquisition cost) burden to the fund. On the other hand, the B&H investor hangs around racking up recurring expenses (annual & semi-annual reports, newsletters, disbursements, mailings of all sorts, etc), which of course means that over an increasing amount of time, the individual B&H investor becomes an increasing expense burden to the fund, more than the individual ST trader. There is no cost advantage gained to a fund by the actions of the B&H investor.

But you argue, “The fund will amortize the acquisition cost of that position --- they probably payback the cost in nine months”. Right on! And there is the rub. With no-load funds, the funds have to recoup their up-front expenses over time from the funds generated in their “total expense ratio” but the ST trader generally doesn’t provide sufficient time for the recovery of those expenses. The funds would appear to be justified in setting ERFs.

But how much is justified and up to what length of time? Those are the questions.

Using your information and some assumptions, let’s see if we can draw some fences around the questions. The typical total expense ratio appears to range from about 1.25% per year to about 2.25% per year, so let’s assume an average total expense ratio in the world of no-load funds to be about 1.75% per year. Your estimate of the average payback period is nine months, which means that the average true cost of acquisition is 1.75% x 0.75 or 1.31% of the amount of the acquired position.

That calculation would imply that on average, an ERF of 1.31% is justified on positions which are held for less than one day. But what is the case if the average ST trader holds his position for an average of 29 days (another number gleamed from your response)? In nine months there are approximately 198 trading days. In 29 days, the fund will collect 14.6% (29/198*100) of the expenses incurred by the acquisition of the position, leaving the fund entitled to an ERF for the balance of 1.118% (1.31 x (1-0.146)).

The maximum average fences appear to be a nine-month time limit and a maximum fee of 1.118%. Are they really justified? I’m not convinced. Advertising costs are a large component of the total expense ratio but that advertising is geared toward attracting the B&H investor, not the ST trader. Furthermore, few if any of the ST traders will have been attracted to the fund based on their advertising. Why should we be expected to pick up the tab for ads that are geared to the B&H crowd? If the fund’s ad budget accounts for 25% of the total expense ratio then we might argue that the 1.118% ERF should be reduced to 0.838% (1.118 x 0.75)

You challenged me to “find a way to make it good for both” the fund and the ST trader. Easy! How about this. Require each fund to calculate their ERF using their actual payback period, the average ST holding periods (for positions held less than the payback period) and their total expense ratio, all from the prior year. Using their own real data, they would calculate their ERF for the next year in the fashion I used above. Fair to them, fair to us, fair to the B&H gray-beards.

But if they really want to do it right, they would develop a sliding scale ERF, in which the ERF would be reduced each month (or week) the position is held. In this day-in-age, a computer could handle the calculations in a nano second.

There are reports of some funds seeking to impose time limits of 5 years and fees in excess of 3%. Such extortion is unjustifiable, indefensible and unconscionable!

To quote you; “As you can see, investors who are in for the long haul are the lifeblood of the business.” Poppycock! This is an example of the kind of conventional wisdom drivel that holds back innovation and sucks the life out of progress. For centuries conventional wisdom has condemned the speculator while at the same time grudgingly acknowledging the benefit of the liquidity that he brings to stabilize the market place. Speculation benefits all markets.

And; “--- you’re the problem, not them.” Rubbish. When a fund manager needs cash to buy that next hot stock, who provides it, the tapped out B&H investor or the ST trader? When he needs to sell a dog from his portfolio where does he lay off the excess cash to, the B&H investor or the redeeming ST trader? We serve a function, we are willing to pay our own share of the load but without being gouged, we are not the problem regardless of what conventional wisdom you were taught in grad school.

And; “there’s nothing in the constitution that gives you a right to buy anything.” Correct but wrong. It’s not in the Constitution but it is common law. I’m sure our lawyer friends would point out that if you advertise for customers without restrictions, you have to accept those customers who swim up to the bait. Hopefully the SEC will limit the restrictions.

Finally; “They’re keeping their money un-invested --- which adds to redemptions ---.” Give me a break. No fund is 100% invested – all carry a reserve for redemptions, the redemptions of speculators do not seriously impact the size of that reserve and finally no solid fund has swung “back and forth from $100 million to $2 million” because of ST trading activity.

I’m old, I’m poor, and I’m unsophisticated, but if Art will allow, I will retread my walking shoes and join him – voting with our feet against the funds that are trying to justify their gouging greed.