November 2019 IssueLong scroll reading

Premium Site Updates: Fund Fee Rating, Category Averages, and Subscription Price

By Charles Boccadoro

Martini: No, it’s not stupid, Signora Mayes. L’amore e cieco.

Frances: Oh, love is blind. Yeah, we have that saying too.

Martini: Everybody has that saying because it’s true everywhere.

From the 2003 film “Under The Tuscan Sun”

ER Rating

Morningstar has long championed funds with low expense ratios. In Ben Johnson’s piece earlier this year, entitled Fund-Fee Study: The Key Factors Helping Drive Fund Fees Lower, he states: “… fees are one of the best indicators of future relative performance, as lower-cost funds generally have greater odds of surviving and outperforming their more-expensive peers.”

Price remains one of the five pillars in its qualitative fund rating system, along with parent, people, performance and process. That said, Morningstar seemed to turn a blind eye to funds charging indefensible front loads, but the industry has since all but buried that issue.

Yesterday, MFO Premium introduced its Expense Ratio (ER) Rating metric in MultiSearch – the site’s main fund screening tool. Funds are grouped or rated versus category peers by quintiles. Funds with lowest ERs receive a 1 (best), while funds with highest ERs receive a 5 (worst). Users can specify an absolute value of ER, say less than 1%, or an ER Rating.

The plot below reinforces why fees matter, something that should seem entirely self-evident. You’ll see that funds with the highest ER tend to deliver the worst returns over their lifetimes, and the opposite appears true. In fact, it’s 2-3 times more likely for a fund with the worst ER Rating to deliver the worst performance. Similarly, a fund with the best ER Rating is 2-3 times more likely to deliver the best performance.

The same holds true even if you extract index or so-called passive funds, as evidenced in the plot below. One other bit of evidence: through September there are 164 funds that share MFO Great Owl and Honor Roll distinctions. Of the 164, only 9 have the worst ER Rating, while 38 have the best.

Take-away:  If a fund in your portfolio has an MFO ER Rating of 5 (worst), you’d better have a good reason for holding it.


Category Averages

Another addition to MultiSearch is Averages. While the separate Averages tool shows category averages for several metrics, like Return and MFO Risk, it is limited in scope and offers few evaluation periods, like 1, 3, 5, 10, and 20 year plus full cycles.

When users select an Asset Universe of Averages, MultiSearch will now present the averages of all metrics as applicable for the 175 categories for any of the 42 evaluation periods selected. It’s pretty cool. Shortly, these new averages will be incorporated as an option in the Portfolios tool when funds are too young for an evaluation period of interest. (See Introducing MFO’s Portfolio Analysis Tool.)

The averages are based on oldest share class, typically; exceptions are ER, Yield, 12b-1 fee, and load, which include all share classes. Also, for convenience, AUM is the sum or total in category not the average. The symbol for these averages is “AV-” followed by the Lipper Category Code.

By selecting “Include Averages,” users can also add the category averages to display along with the other selected criteria, as illustrated below for the oldest Large Cap Core funds in our database.

Exporting MultiSearch results for all the Averages easily enables users to assess AUM across categories, subtypes and types, as illustrated below. Generally, equities/U.S. equities, bonds, and money market are where folks keep their money. (Note: There are about 1750 Fund of Funds in our database, which collectively hold about $2.5T, mostly affecting the Mixed Asset sums.)

Subscription Price

Beginning this month, we will be upping the price (donation level) of an annual subscription to MFO Premium from $100 to $120 for individuals and from $500 to $600 for companies. Company subscriptions give access for up to 10 individual accounts.

This increase covers corresponding price increases in our Lipper (now Refinitiv) datafeed. It also covers a (hard to believe) service sales tax being imposed on Lipper by Iowa, where our non-profit resides, as well as higher costs of our new user portal.

We believe the price remains a bargain, especially given the extent to which the site has evolved since its inception four years ago, thanks to continued feedback and recommendations from our subscribers. We’ve received considerable praise this past year. Here are a few from folks who’ve agreed to share:

“I look forward to more good things from the Premium Site, the best bargain in investing.” James C. Pursley, President and Chief Investment Officer, Gaia Capital Management, Inc.

“Damn, man, a major thumbs-up, with tons of admiration … it is an amazing site.” David R. Moran, active MFO Discussion Board member.

“Overall, one of the most powerful and comprehensive fund screeners I’ve come across.” Samuel Lee, founder SVRN Asset Management, LLC.

“Your site is fantastic and we seem to rely on it more-and-more these days to search and monitor client fund investments.” Michael P. Egan, CFP, Diversified Management, Inc.

With your continued support, we promise more good things to come.

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About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.