Jumping Around

By Ramesh Akkineni

Robert Torray of the Torray Fund about the high expenses people pay

Why people find it necessary to attach definitions like GARP (growth at a reasonable price) to the process escapes me. The only answer I come up with is that in so doing, armies of consultants and brokers, rating services, and the media position themselves to make a handsome living comparing one approach to another, record against record, and so on. This charade is responsible for the wasteful churning of portfolios and the public’s nonsensical jumping around from one mutual fund to another.
Last year trading amounted to 40 percent of the assets of more than 4,000 stock funds. I’ve been in business 40 years, and during that time there has not been an ounce of value added by the crowd that’s been feeding on the relative-performance game.
The Securities and Exchange Commission reports that taxes cost mutual fund shareholders 2.5 percentage points of return annually over the past 10 years. The industry’s expense ratio absorbed another 1.5 percentage points. On top of that, many investors pay 1 percent in fees to financial advisers to manage portfolios of funds for them. Together, these charges totaled 5 percentage points.
Corporate earnings grew only about 6 percent annually over the past 50 years. The irony will be lost on no one that investors have been hit by all three of those costs—taxes, fund expenses, advisers’ fees—have transferred nearly the entire value of their owning stocks, their growth in earnings, to financial intermediaries and to the Internal Revenue Service.

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