Planadviser.com, CT
12-06-07
Study Says Help From Brokers Isn’t Leading to Higher Returns
Fred Schneyer
Investors in loaded mutual funds underperform their own funds' reported returns
by three times as much as no-load fund investors even though the load investors
are paying for brokers to help them, according to a new study.
A news release from the Zero Alpha Group (ZAG) said fund investors in all three
principal load-carrying retail share classes (A, B, and C) experience worse timing
than investors in no-load funds and no-load index funds. That means, the study
asserted, that investors in load funds actually suffer more when it comes to
timing. Among A,B, and C class funds, “Class B investors suffer from the poorest
cash flow timing, underperforming a buy-and-hold strategy by 2.28 percentage
points annually, compared with annual underperformance of 0.78 percentage
points for investors in pure no-load funds,” the fund says.
The study concludes: "We find that investors who transact through investment
professionals using conventional distribution arrangements experience
substantially poorer timing performance than investors who purchase pure noload funds…. No-load index funds are the only funds found to show no evidence
of poor investor timing."
The announcement said that the actual performance experienced by fund
shareholders differs substantially from the performance of the funds in which they
invest because of the timing of investor cash flows.
"Investors pay fees to brokers expecting to receive good financial advice, but
mounting evidence suggests that many are worse off as a result,” contended
Mercer Bullard, study co-author, founder and president, Fund Democracy, and
securities law professor, University of Mississippi School of Law. “Investors'
actual performance has long lagged the performance of mutual funds in which
they invest, yet paying for advice from brokers may increase rather than
decrease this performance gap. Perhaps brokers shouldn't always be expected
to put you in the fund with the best investment performance, but at least they
should get you the returns of the fund they put you in."
The press release said the study found that:
* Investors in active funds suffer more than three times the annual
underperformance of index fund investors; 1.7% versus 0.47%. Investors in noload index funds suffer no performance gap, however.
* Investors in load funds and legal no-load funds (funds with no load and a low
12b-1 fee) experience annual returns that lag the performance of the funds in
which they invest by 1.82% and 1.91% respectively. Among all load funds, Class
B investors suffer from the poorest cash flow timing, underperforming a buy-andhold strategy by 2.28% annually. In comparison, investors in pure no-load funds
(funds with no commission and no 12b-1 fee) experience an annual performance
gap of 0.78%.
Entitled "Investor Timing and Fund Distribution Channels," the ZAG-sponsored
study is co-authored by Bullard; Geoff Friesen, assistant professor of finance,
College of Business, University of Nebraska-Lincoln, Lincoln, Nebraska.; and
Travis Sapp, assistant professor of finance, College of Business, Iowa
State University, Ames, Iowa.