Hi Hank, Hi msf,
Thanks for your comments, especially those most recently made.
The active vs. passive management debate will remain a hot topic. While the overwhelming academic research concludes that passive is the winner on average and in the long haul, limited evidence suggests that active management can deliver superior returns and/or reduced risk over some periods. The secret sauce is to discover the right manager for the right timeframe.
That's not an easy task; what worked in the past need not work in the future. Fund manager Bill Miller is a great example. He outperformed his benchmark for 15 consecutive years and just a few years later scored in the bottom 1% of all active managers. Things change.
A successful active manager wins over some timeframe using a specific methodology that reflects his knowledge and his biases. Once again things like macroeconomic conditions change and the active manager is not flexible enough to either recognize the changes or to adjust his methods. That was Bill Miller.
If you favor active fund management, you must actively evaluate active managers. That's tough work, but necessary to capture the small percentage of fund managers who do beat their benchmarks. It's a changing group since persistence is not one of their basic characteristics.
Benchmarks are needed to challenge and test the quality of active fund management. For lhose funds that specialize in large companies, the S&P 500 Index seems to provide a respectable, albeit an imperfect measure.
I did know that a committee controlled the firms represented by the Index, and that a few changes were made annually based on rules and judgments. I am not aware of the weightings given to the formulaic portion of the decision process and the heuristic portion.
I am not adverse to having a human heuristic segment. For something as uncertain as company assessment and the stock markets, equations alone will never be perfect. But too much emotional heuristics can ruin a useful market tool. The balance is a difficult target, but the S&P 500 committee seems to have done an acceptable job. By rule, they must maintain a proper weighting in the 11 major sector categories. Nothing is ever perfect in the marketplace; a satisficing strategy must do.
Best Wishes.

This is a bit of a sidetrack, but is spurred by jstr's use of S&P as a prototypical index provider.
S&P's "indexes" do not have "systematic selection criteria", at least the way I would use that phrase: "entirely rules-based and containing no judgment".
See, e.g. "What Is an Index" http://alo.mit.edu/wp-content/uploads/2015/10/index_5.pdf
Unlike other index providers such as Russell, Wilshire, etc., Standard and Poor's has a human index committee that applies judgment in selecting securities for index inclusion. Notable is its criterion for removal: "lack of representation". This potential for subjective tinkering was out in full force at the peak of the dot com bubble:

The S&P 500 is often mischaracterized as a passively managed index of large stocks, but in 2000, its managers became seriously aggressive -- adding (and subtracting) four new stocks each month, on average. In the process, the index was systematically stripped of small and mid-sized value stocks from Jan. 28 to Dec. 11 in favor of large-cap growth stocks -- largely from the technology sector, and at exactly the wrong moment.

https://www.thestreet.com/story/1305526/1/make-a-bundle-on-the-sps-rejects.html
More recently, S&P made rule changes not to improve how well its index represented the market or the index's investability, but to improve S&P's bottom line:

In 2008 and 2009, S&P . . . tossed nine companies off the 500 for inverting. But four years ago [June 2010], S&P changed course, for business reasons. Companies were angry at being excluded, and index investors wanted to own some of the excluded companies. Moreover, S&P feared that a competitor would set up a more inclusive, rival index.

http://fortune.com/2015/11/23/pfizer-dow-jones/
Systematic selection criteria? Yeah, right.

The advent and growth of ETFs / index funds and the availability of funds that can focus on specific stock universe attributes in the 21st century, has validated / shed light on that ( Buffet's ) advice. Further improvement in computing power and growth of quantitative finance has also streamlined and improved the management process.
Take the S&P Mid Cap growth index / ETF for example. The MDY ( S&P Mid Cap 400 growth ETF ) was launched when Buffet / BRK-A started to become noticed in the mainstream ( mid 1990's ). ( It appears that ) the Mid Cap index has specific, systematic selection criteria for management of the index. Reading literature ( shareholder letters, anecdotal evidence contained in books and articles ) on Buffet's methods seems to belie a somewhat idiosyncratic and haphazard process in position sizings and weightings, asset holding periods, and the occasional use of sophisticated "derivative" products ( this can be said for Icahn also ). If Buffet's "genius / greatness" has been reflected in BRK-A's share price, then a buy & hold of the "diversified index fund" ( Mid Cap 400 ) definitely has had an edge for a couple of decades and from different starting points. https://docs.google.com/document/d/1Kv2UtpBp7OIK56ZzrkthnV1PDRUA9AmGS6hAmr3Tl6A/edit?usp=sharing
Application of this simple quantitative tactical strategy for example, has produced further excess, risk adjusted returns vs. buy & hold https://docs.google.com/document/d/1WLB4hOP8P15O8b10_P4VgHuuBQHHke_c3XjwAjiFqio/edit?usp=sharing
As the management industry migrates towards "passive" indexing, perhaps gone is the discretionary and esoteric based management style that once reigned in the 20th century ?

FYI: Looking for yield in a closed-end fund these days is like buying a pen at Tiffany's — you'll get what you're looking for, but you'll pay an awful lot for it.
But the preferred stock offerings of many closed-end funds could be a lucrative way to get yield at a reasonable price.
Regards,
Ted
http://www.investmentnews.com/article/20161014/FREE/161019955?template=printart

FYI: Your mutual funds may have a dirty little secret, but someone has just published an exposé.
In fact, according to the first carbon-footprint analysis of over $11 trillion in global funds and ETFs, all 10 of the world’s top asset managers have fund lineups with a higher average carbon footprint than an S&P 500 benchmark.
Regards,
Ted
http://www.fa-mag.com/news/find-your-funds--dirty-secrets-with-this-new-tool-29487.html?print

Hank asked, "In other words, do the instructions to his trustees also represent prudent advice on how all of us should invest?"
Everyone that invests will have to pave their own road to riches but I believe that Mr. Buffett's advice is a solid bed on which to apply the final layer. In my own plan I disregard the bond fund advice and substitute that portion with my SS account. My stock holdings are roughly 85% US (half & half S&P 500 and others) and 15% foreign. We should remember that Warren's advice was a general recommendation for most (not all) investors. I venture to guess that over 50% of folks who contribute to a 401k or similar have no idea what they own or why they own it.

@hank
Is this the thread, from March 5, 2014, to which you refer?
http://www.mutualfundobserver.com/discuss/discussion/11836/warren-buffett-suggests-a-portfolio-of-90-s-p-500-index-fund-and-10-short-term-bonds

For more on the principles of swing pricing, and the different ways it can be applied:
http://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL.pdf

@TSP financials.morningstar.com/fund/management.html?t=CAALX
Also: https://sec.gov/Archives/edgar/data/809593/000113322816011586/e446873_485apos.htm

Fond memories from the Way Back Machine
01/22/2007 From M*
Numeric Investors decided to get out of the mutual fund business. On Feb. 23, it will liquidate all of its retail mutual funds. Numeric is closing the funds because they compose only 3.5% of its business (about $450 million out of $13 billion), and three of the four funds are closed to new investors,
This is a surprise and a real disappointment because the advisor runs some excellent quantitative funds, it has shown itself to be a shareholder-friendly shop, and many of these fund's strongest peers are closed.
http://www.morningstar.com/advisor/t/42991190/fund-times-numeric-funds-to-liquidate.htm
N/I Numeric Investors Small Cap Value
NISVX (not valid )

Hi Guys,
"My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers."
That is a recent quote from Warren Buffett. Over many years he remains consistent in his investment recommendations. Here is a quote from his 1996 Shareholder Letter:
"Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals."
I recently discovered a fine set of investment videos from an outfit in England. They practice what Buffett has been saying for decades for most investors. The presentation material is not very sophisticated, especially for most of MFO participants, but it includes many brief segments from famous US researchers. It's all about sensible investing which is the name of the firm that produced the video. Your enjoyment will most likely be tied to your preference for active or passive investing strategies. Here is a Link to one of their 1 hour videos:
https://www.sensibleinvesting.tv/passive-investing-the-evidence
Enjoy. Since I do a mix of both actively and passively managed mutual funds, I did enjoy it. I am slowly moving more of my funds in the passive direction.
Best Regards.

SEC Final Rules page: https://www.sec.gov/rules/final.shtml
Perhaps the bigger item got buried - funds are now allowed to use swing pricing in times of stress (essentially impose redemption fees by passing through the cost of selling underlying securities to meet redemptions).
Here's that SEC final rule (198 pages):
https://www.sec.gov/rules/final/2016/33-10234.pdf
There's got to be more on the liquidity rule than is being reported, especially regarding Vanguard. Here's the SEC final rule (459 pages): https://www.sec.gov/rules/final/2016/33-10233.pdf
First, because ETFs would seem to have a liquidity problem similar to open end funds. When there is large selling pressure, authorized participants (AP) are supposed to swoop in, buy up the ETF shares being sold on the open market, and then sell the underlying securities at a profit. So even though the fund itself doesn't sell assets, the APs are expected to. if they don't (because of illiquidity) the ETF price could go into free fall.
Second, the report says that this rule applies to funds that provide daily portfolio information. What sort of info? All ETFs provide indicative NAV and portfolio composition files, but they are not required to provide daily portfolios. In fact, Vanguard discloses its ETF portfolios only monthly.
Third, Vanguard's ETFs are unique in that they are simply shares of an open end fund portfolio. Is this a back door way for Vanguard to avoid meeting liquidity requirements on its open end funds?
P.S. No, I have not read the 650+ pages from the SEC.

I was aware of the tax differences, but didn't mention it for a couple of reasons. One was that we weren't talking about tax-adjusted figures. The other was because the situation is more complex than you described in case 2 (where the fund pays the advisor).
When funds skim money to pay for expenses, they first take that money first from interest, nonqualified divs, and possibly short term gains that would otherwise be distributed.
If it has enough ordinary income to cover the advisor payments, then what happens is simply that your ordinary income divs are reduced by the amount of the payments. That's equivalent to a straight deduction against ordinary income. The NAV would not be affected by paying this additional cost.
For example, if there's $5 of interest income/share available and the fund pays your advisor $4, then it distributes $1 of ordinary divs and the NAV drops $5. If it doesn't pay your advisor (case 1) then it distributes $5 of ordinary income to you, the NAV still drops by $5.
If the fund reduces its cap gains distributions (rather than its ordinary income distributions) to pay the advisor, then again the NAV is unaffected but now you'll see your cap gains income (as opposed to ordinary income) reduced by the advisor fees. A less valuable income reduction.
The NAV would be affected in the way you described only if the fund had to use assets that it would not otherwise have distributed. That is, if the portfolio did not generate enough income (via interest, divs, net gains), to cover costs, then the fund would have to use actual share value to pay the advisor.
If the NAV were reduced (or its increase diminished), you would indeed be able to capture the expense as a capital loss (or reduced gain). This is a less valuable loss than the two above - first because its is a capital loss vs. a reduction of ordinary income, and second because you'll only recognize it when you ultimately sell your shares vs. a reduced distribution that is recognized now.
So the tax impact in case (2) is quite variable, in both nominal value (ordinary income vs. cap gains) and present value (available in current tax year or only when shares sold).
You are correct about the 2% AGI floor, so the value depends in part on what other misc. deductions you had (e.g. tax prep fees), and whether you are even itemizing.

Suppose you have an advisor who charges 1% for managing your account and he gives you two choices for how he'll collect his fee:
1) He'll periodically skim money from your account, let's say on a daily basis, or
2) He'll delegate that to the fund company that will then skim money from the fund on a daily basis and remit it to your advisor
I think you'd agree that your return is the same either way. Same tithing, same schedule, it's just the collection mechanism that's different.
Case (1) is a wrap account with F-2 shares and a 1% fee. Case (2) is a commission-based account with C shares (1% 12b-1 fee, for the sake of argument all going to the advisor).
One would probably expect the returns of those two classes of shares to be reported differently. Therein lies the problem. Your return is the same, the payment to your advisor is the same, and yet one class' returns are different from another, simply because of the payment mechanism.
What this suggests to me is that to the extent possible, one should keep the payment mechanism out of the return data. I want the performance figures to represent how well the portfolio did, not what I paid or didn't pay to my advisor.
We can keep the advisor fees (which as OJ noted can vary) out of the equation for A shares. Unfortunately, they're baked into the equation for B and C shares. Even worse, you've got the reverse problem with B shares - the performance figures understate actual performance. That's because B shares convert to cheaper A shares after some number of years, but the performance figures assume the same higher expenses ad infinitum.
The 30th percentile estimate is likely in error, though I haven't checked. I'm guessing that when you multiplied the ending value by 94.25% (i.e. reducing account by 5.75%), you did not do the same for all the other front end load funds. Their performance figures should have been reduced as well.
FWIW, M* does incorporate the impact of loads in its star ratings. That's why AMECX is 4*, but AMECX.lw is 5*.

FYI: For investors wondering if a sin stocks exchange traded fund would ever be reborn, the next best thing may have come to town Wednesday with the debut of the Spirited Funds/ETFMG Whiskey and Spirits ETF WSKY, -0.72%
Regards,
Ted
http://www.marketwatch.com/story/whiskey-a-go-go-make-a-toast-with-this-new-etf-2016-10-13-5464026/print
MarketWatch Article Two On WSKY:
http://www.marketwatch.com/story/bottoms-up-new-etf-tracks-the-global-growing-whiskey-market-2016-10-12/print

When a combined $58 million in lobbying dollars from the financial industry are targeted to the Senate Finance Committee ( for 2016 PACs and individual campaigns), I do not have to think very hard about whether money talks. Like another poster at MFO, it doesn't take much like this for me to become cynical. It is such an obvious affront.

As with most load funds, it looks like the no load R1 version charges higher expenses, mostly in the form of a giant 12b-1 fee, so long-term investors are still better off paying the load if they plan to stick around for a long time.

Part of that is correct, but you're looking at the wrong share class - it's F1, not R1.
All funds have costs associated with maintaining accounts, such as producing annual statements for existing investors, answering their questions, etc. Ultimately it is the investor who pays these costs, but the mechanics can vary from fund to fund.
For example, American Century funds have a single "all in" fee. You pay the management company a flat fee, and they cover all the expenses. For Ultra Investor class shares TWCUX , that's 0.98%. Some of that is going to pay the actual managers, but a fair chunk is going to pay for servicing the accounts (or to pay the NTF platforms to service the accounts for them). Since servicing institutional accounts is cheaper (less to do per dollar in the account), the institutional shares TWUIX charge an "all in" fee of just 0.78%.
There's no 12b-1 fee there, there aren't even "other" fees. But you're still paying a percentage for the servicing and for the NTF platform.
Most funds don't use an "all in" fee schedule. They may bury the servicing costs in "other expenses". Or they may list a separate line item for servicing fees. Usually that shows up as a 12b-1 line item. Whether the cost is called out or not, it's there, and you're paying it.
What matters is not whether there are separate line items, but how much your total expenses are. TWCUX (0.98% ER) is not a better deal than TIIRX (0.73% ER) simply because it has no "other" expenses. TWCUX has just internalized those expensees and you're still paying for them. TWCUX is not a better deal than TIIRX because it doesn't have a separate 12b-1 fee. It has just internalized the servicing costs and you're still paying for them.
TIIRX is the better deal because it costs less "all in".
Where you are right is that 12b-1 fees above 0.25% must be used for marketing and sales, not for running the fund, for maintaining existing accounts. That's money that isn't being used to help you, the investor. And that's why funds with 12b-1 fees above 0.25% cannot be called noload funds.
R1 funds, with 1.00% 12b-1 fees are not no load funds. And they're not the share class discussed in the M* article.

But what does that mean? The load drops to the bottom line of the investment advisor or they get used for other expenses that are normally collected through 12b-1 fees, right? And 12b-1 fees are supposed to be used for sales and marketing, no?

No. As explained above, a fund can market itself as a noload fund only if its 12b-1 fee does not exceed 0.25% and only if that fee is used for servicing accounts, not for sales and marketing. So the F-1 shares (0.25% 12b-1 fee) use the fee for servicing the accounts (i.e. they pay Fidelity and Schwab to service the accounts).
https://www.sec.gov/answers/mffees.htm

As usual for M*, not only don't they mention the giant 12b-1 fees for the R1 class, they actually go so far as to talk about how American Funds' fees are low in almost all cases- for the load bearing shares of course and without considering the load I believe.

They don't talk about the R1 class because they're writing about the F1 share class that retail investors can purchase noload without using an advisor. Matching fund against fund, AF vs. most other fund families, you'll find that AF funds, all in, are cheaper. Their A shares are cheaper than other load families' A shares, and their F-1 shares are cheaper than most families' noload shares, whether the family is a load family or a noload family.

Hi @Charles,
Let's look at the other side of the coin (so-to-speak).
I am an AF shareholder that paid the "one time sales load" many years back before there were a good selection of no load funds. As I understand these no load (F1) shares are for wrap accounts where an ongoing account wrap fee is charged rather than a one time upfront sales load. In talking with my broker I was told I will be good to go (as in the past) with my self directed ira account which would be grandfarthered with no wrap fee charged. Now, I am thinking that is indeed a good deal. Although, I can not put new money into this account after April 2017 (retired now so that is not important to me) I will be allowed to do nav exchanges within fund families owned in this account. And, to, of course, sell fund shares and to take distributions as I have done in the past. Since, all of my funds within this account are set for their distributions to pay to cash, at this time, sales are not necessary. It is uncertain at this time if I can buy new shares with my fund distributions unless I set the account up before April 2017 for reinvestment of fund distributions. Since, I am retired I most likely will leave the funds distributions set to pay to cash. While, my son, who is still working, will leave his account set for reinvestment of fund distributions.
Also know, some American Funds A shares can be bought back of the 5.75% sales charge you reference.
I'm thinking I've got a good deal ... no ongoing wrap fee for me. From my perspective I've got the better deal over what new investors will be getting today who invest in F1 shares and have to pay ongoing wrap fees.
Skeet

FYI: For international funds to race ahead of domestic funds, you typically need a falling dollar and rising foreign markets.
This year, most international funds are misfiring on at least one cylinder. The average large-company foreign blend fund has gained just 2.38% this year, versus 5.87% for its domestic counterpart. You can blame either a strong dollar or weak foreign markets for the poor performance.
Regards,
Ted
http://www.investmentnews.com/article/20161011/FREE/161019984?template=printart

Exisiting AF shareholders who have paid 5.75% load should feel really good about this ...