Investment Returns Calculation and Good vs. Bad?

[Keopele]

I have a newbie question. When a mutual fund reports investment returns, are dividend reinvestmenst included? For example, my open-ended mutual fund has an unrealized gain of 9.13% since 7/13/06. With dividend reinvestments my investment return is 16.7%. I ask because I think that's pretty darn good, but this fund has an average two-star morning star rating and an expense ratio of 1.9% I am just starting to REALLY pay attention to my FIRE goals (31yrs old). I went with UBS because my parents have accounts with them and I was set up with this fund as a gift. I NEVER see UBS mutual funds in the financial news or magazines...I actually even tried to find the mention of UBS in a financial magazine with no luck. I've had good relations with my financial advisor there.. I even opened a separate Roth IRA there (in the same mutual fund). So I feel good about the 16.7% total return and the financial advisor, not so good about the 1.9% expense ratio, low morningstar rating and lack of UBS support in general. How do others weigh the good vs. the bad?

 

[LOL!]

When I compare investment returns, I look for 2 things. First, I look for the benchmark which for me is gonna be an index fund that corresponds to the fund. Second, I also make sure that the fund compares well to its peers.

I think since 7/13/06 most stock benchmarks are up 25% or more. The S&P500 is up 26% and it's the worst of the bunch.

 

[JustCurious]

In the last year, Vanguard's S&P 500 index fund (VFINX) returned 24.46%. And the expense ratio is only .18%.

http://http://finance.google.com/finance?q=VFINX

Does the performance of your fund still look good to you? What fund is it? What types of stocks does it hold?

How about a balanced portfolio of U.S. and International stocks with 10 percent bonds (VFIFX), which returned 24.81% in the last year with a .21% expense ratio? How does your fund return look now?

 

[Nords]

When a mutual fund reports investment returns, are dividend reinvestmenst included?

Almost never. It's so rare that if it's ever included the data provider will usually explicity say so.

With dividend reinvestments my investment return is 16.7%. I ask because I think that's pretty darn good

The returns should be assessed in the context of the performance of the benchmark index investment, whatever it is for your fund. If the benchmark returned 10% over the same period (including reinvested dividends) then the manager got lucky or is a financial genius (we'll know the difference in approximately two decades). If the benchmark returned 18.6% over the same time period then you're being charged 1.9% by a manager running an index fund. If the benchmark returned 25% over the same period then your fund sucks or your manager's long-term performance is just temporarily lagging the index (we'll know in about five years).

The benchmark index is usually subject to controversy, especially for smaller niche funds.

... but this fund has an average two-star morning star rating and an expense ratio of 1.9%

Ouch. Just... ouch. If your ER SWR is 4%, and you're paying 1.9% in expenses on a $1M fund, that means you're only keeping $21K of the fund's $40K SWR. In other words that 1.9% expense ratio doesn't look too bad as a percentage of assets under management, but the expenses are also 47.5% of your withdrawals!

We're getting out of a fund that charges 1.38% because an equivalent index is only 0.6%. Most websites & advisors advocate keeping expenses under 1%, although index funds can get you down between .10%-.25%.

Now I have a question-- is "Keopele" a Hawaiian reference?

How do others weigh the good vs. the bad?

By:
1. Comparing a fund to the benchmark, or
2. Buying the benchmark as an index fund (or ETF) with Fidelity or Vanguard.

Most of a portfolio's returns are a function of an asset allocation that allows you to sleep at night (whatever that is for your situation) and your fund expenses. The better you sleep and the lower the expenses, the better you'll do...

 

[LOL!]

Almost never. It's so rare that if it's ever included the data provider will usually explicity say so.

My experience is otherwise. Total return which includes dividend reinvestment is always quoted for mutual fund. It is rare to not have it included. Did you really mean what you wrote?

 

[Keopele]

Wow...no not at all. UBS Global Allocation BNPCX. I suppose I felt comfortable at 16% against average S&P average of 10.3% historically. So, really without my DRIP and base return at 9% in last 11 months, this really is not a good fund. Funny thing is, I reviewed the UBS annual mutual fund report and determined that mine was great compared to the rest. Okay, another newbie question, what are the advantages of an index fund? It sounds like I need to do some shopping for a new fund company. Thanks already for all of learned from everyone here in the few short weeks i've been here.

 

[JustCurious]

Keopele, you came to the right place for unbiased financial advice, we can help you get on the right track. The bottom line is that UBS is taking you for a very expensive ride, and you need to get away from them. But my advice is don't do anything rash, take some time to do some research.

The first thing you should do is get a book called "The Bogleheads Guide to Investing." Read that book. Then, if you have any questions, come back and ask. I am not trying to put you off, but you need to do some reading first to "get your mind right." (That's a reference to Cool Hand Luke)

 

[LOL!]

In the last 12 months the Vanguard Global Equity fund returned about 35%, but it is almost all equities, while the BNPCX is about 76% equities so it's more like a balanced fund with some international in it. I think a good comparison might be Dodge&Cox Balanced or the Vanguard Target Retirement 2020 or 2025 fund. Here is a comparison:
Fund Research Wizard - Comparison - MSN Money

 

[LOL!]

Plus one should be aware the C class fund shares are the worst class for investors such as yourself. That is, the financial advisor is getting paid exhorbitantly from the fund.
See this discussion: Invest Wisely: Mutual Funds

 

[JustCurious]

Take a look at the prospectus for your fund....

UBS - UBS Global Allocation Fund

Look at page 18 under the heading "Expenses and Fee Tables"... you will see that you are also paying 1% for a "contingent deferred sales charge load" and 1% for a "redemption fee" (only applies if you redeem within 90 days). So even assuming you hold the fund for more than 90 days to avoid the redemption fee, your total expenses are 1.91% (the expense ratio), plus 1%, for a total of 2.91%.

They also charge a $5.25 fee to "purchase or redeem shares." (See footnote 1 on page 18 )

Do they charge any account maintenance fees or annual fees or other fees to have an account? The bottom line is that you are being scr**ed, and you didn't even know it (at least until now).

 

[LOL!]

The contingent fee is just that: contingent. She is not paying it.

 

[JustCurious]

On what is the contingent fee contingent?

 

[LOL!]

It's contingent on if one withdraws the money before a specified time period has elapsed. In this case, it's a one year period after purchase as described in the prospectus. Any shares sold after holding them longer than one year will not have this fee added (actually subtracted from what you get).

 

[JustCurious]

Ok, I missed that qualification. But she is still getting a very, very bad deal here.... I understand why the advisor is being nice to her... he needs to send his kids to college after all!

 

[Keopele]

Part of me wants to throw up....but I'll chalk this up to "lessons learned". Overall, I still feel pretty good about where I am....young, 13% 401k contribution, debt free except car and house (only house after this year). The investment side of FIRE is overwhelming to a beginer. I think I'll go buy the Bogelhead's guide to investing....have a read and then start researching my mutual fund and Roth move. Thanks again for helping me seeing the truth in my fund. This fund should really be called... BOHICA

 

[JustCurious]

You should also read "The little book of common sense investing" by John C. Bogle. Mr. Bogle is the founder of Vanguard.

 

[JustCurious]

I don't know how often you make contributions to your IRA, but if it is monthly, then you pay the $5.25 fee for each purchase according to the prospectus, which is $63 per year. Assuming you contribute the max which is $4,000, then that is a 1.57% fee ($63/$4,000). And that is on top of the 1.91% expense ratio, so the total expense is 3.48%.

 

[Nords]

My experience is otherwise. Total return which includes dividend reinvestment is always quoted for mutual fund. It is rare to not have it included. Did you really mean what you wrote?

Yes, I do mean that.

I'll defer to your mutual-fund experience, of which most people have more than me. I can't ever remember Fidelity or Tweedy, Browne crowing over their total return/reinvested dividends numbers, although I haven't been looking for it.

You almost never see "reinvested dividends" information in charts or graphs of ETFs, stocks, and indices. One example is the classic thread about how "everyone lost money in 1966-82", countered by a poster who says "unless they reinvested dividends", followed by each whipping out their own very different charts-- one with dividends, one without.