In this course, you will start by reviewing the fundamentals of investments, including the trading off of return and risk when forming a portfolio, asset pricing models such as the Capital Asset Pricing Model (CAPM) and the 3-Factor Model, and the efficient market hypothesis. You will be introduced to the two components of stock returns – dividends and capital gains – and will learn how each are taxed and the incentives provided to investors from a realization-based capital gains tax. You will examine the investment decisions (and behavioral biases) of participants in defined-contribution (DC) pension plans like 401(k) plans in the U.S. and will learn about the evidence regarding the performance of individual investors in their stock portfolios. The course concludes by discussing the evidence regarding the performance of actively-managed mutual funds. You will learn about the fees charged to investors by mutual funds and the evidence regarding the relation between fees charged and fund performance. Segments of the portfolios of mutual funds that may be more likely to outperform and examples of strategies designed to “earn alpha” will also be introduced. Learners are welcome to take this course even if they have not completed "Investments I: Fundamentals of Performance Evaluation," as the first module contain a review of investment fundamentals and regression analysis to get everyone up to speed. Also, the course contains several innovative features, including creative out-of-the-studio introductions followed by quick-hitting "Module in 60" countdowns that highlight what will be covered in each module, four "Faculty Focus" interview episodes with leading professors in finance, and a summary of each module done with the help of animations! This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.
4-1.3. Brokers and Fund Performance
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來自 University of Illinois at Urbana-Champaign 的課程
Investments II: Lessons and Applications for Investors
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Module 4: Performance of Mutual Funds and Search for Alpha
In Module 4, we will learn about the evidence regarding the performance of actively-managed mutual funds. We will also discuss a few examples of portfolio strategies designed to “earn alpha” (i.e., yield positive risk-adjusted returns).
與講師見面
Scott WeisbennerWilliam G. Karnes Professor of Finance
Department of Finance, College of Business
[MUSIC]
So, mutual funds can be offered through different channels.
And that's something you should think about as an investor.
So individuals invest, of course, in mutual funds through their defined
contribution pension plans, so that's very straightforward.
But individuals may also invest in mutual funds
outside these defined contribution plans.
So you can buy these funds through a broker or financial advisor or
you can purchase them directly from the fund company, over the telephone or
over the internet probably more likely.
So is there any evidence on the difference in both the gross and net performance of
funds offered through the broker-channel versus the direct-channel, okay?
Do we see the funds that you get, bought through a broker doing any better or worse
that those that you can just buy on your own directly through the fund company?
Okay, so mutual funds offered through different channels.
Here, would be kind of the typical setup of you visiting kind of a broker or
financial advisor.
They're giving you some options for some funds, and
you pick one with their guidance, or you can do it directly yourselves.
So you might have a more up-to-date computer than this, this is a Datatron 205
circa mid 1960s used by NASA and US Geological Survey.
This computer boasted that it
can do in 30 minutes what it would take four mathematicians a year to do.
So maybe if you're routing your order through this,
it might take a little longer but
you presumably have a laptop that have a much greater computing speed here.
So, what are the various fees to think about and how do these
fees vary by whether you're buying the fund directly through the company or
you're buying it through a broker.
So there can be front-end or back-end loads.
So for example, when I buy a fund, right off the bat, I pay 5%.
So if I have $100 to invest, I pay 5% right off the top and
then I am only left with $95.
Or a back-end load, when I sell the fund,
I may lose 1 or 2% as a back-end charge.
This is compensation,
this is a distribution charge typically not present for directly bought funds.
So you'll generally see more the broker-sold funds have these front-end and
back-end loads, this is a distribution charge, compensation for their services.
You don't see these front-end back-end load very much for directly bought funds.
So that's something to keep in mind.
Also annual fees that you pay.
So this is, you pay 1% of your balance, you pay 0.5% and
annual fee is also a fee you are charged for investing in a mutual fund.
Now these annual fees, they're composed of both management fees,
what are you paying for the manager, for their stock picking ability?
And then also separate component in the annual fee, that's fees to compensate for
marketing and distribution cost, and these are called 12b-1 fees.
These 12b-1 fees are generally higher for broker-sold
funds as opposed to funds you just buy directly through the company, okay?
So, Bergstresser, Chalmers and Tufano, they examine the differences and fees,
and the performance of directly-sold mutual funds and broker-sold funds.
And they use data to do this analysis Over the period 1996 to 2004.
So let's see what conclusions they drew, what the data told them about
the differences for directly-sold funds and broker-sold funds.
Okay, so first let's just start off
by looking at differences in annual performance here.
So we're looking here at equity funds and we're looking at those that
customers buy directly from the company versus those that are broker-sold, okay?
So, first, and then we can also look at these funds on an asset weighted basis or
an equal weighted basis.
So asset weighted basis would mean, we give a higher weight in taking the average
to funds that have more assets under management.
And we give a lower weight to funds that don't have much investment in them.
When we do equal weighted, we just take the average across all the funds, whether
they have a lot of money in them or a small amount of money invested in them.
Let's actually start the equal weighted first.
So we see here for the direct funds, the mutual funds that
people can buy directly from the company over this 1996 and 2004 period.
The average return, net of expenses, but excluding 12b-1 fees.
So we're looking at returns here that are, after paying the management
expense portion of the annual fee but before paying the distribution 12b-1 fees.
So we see the directly bought funds averaged 10.5%, only 8% for
the broker funds.
So a difference here of 2.5% per year.
Now when you look at asset-weighted, this might reflect here,
like, hey, there's really some kind of bad broker-sold fund out there.
But not many assets are invested in them.
So let's look at the asset-weighted difference.
Here the difference is about 0.4%.
So if we're looking at the return investor gets, minus the management fee and
we're not taking into account this 12b-1 fee.
We know the brokers need to get paid, so there's going to be a higher 12b-1 fee for
the broker-sold fund, we still see the direct-sold funds beating
the funds from the brokers by 0.4% on an annual basis.
And this isn't having any risk adjusted, although the P value for
this is 0.16 isn't statistically significant, okay?
Now once we control for risk, we see kind of still, differences remain.
Looking equally weighted across these funds,
comparing the direct-sold fund versus the broker-sold fund, you see,
do we use CAPM model, Fama French 3-factor model, 4-factor model,
we're looking at the difference in the risk adjusted performance, alpha,
across the two funds, subtracting out management expenses,
you see differences here of about 1% on an annual basis.
Now once we evaluate, so we take into account, hey,
let's give a higher weight to funds that have more assets under management,
a smaller weight to funds that have less assets under management.
We see still differences remain depending upon whether you use a CAPM,
the difference between directly-sold and the broker-sold 0.3% on an annual basis.
Going up to almost 1% point difference.
Okay,and you can see these results here are statistically significant given their
low p values here.
So this is over a sample of looking at all of the equity funds.
You may say, well maybe there's difference, maybe for
directly bought funds there's more index funds.
Maybe for broker sold funds, maybe the brokers
tilt their clients more to more expensive actively managed funds.
So, let's exclude index funds from the analysis and
see if these differences remain, and the answer is yes.
They're basically the same,
you see that the direct bought funds are outperforming the broker-sold funds,
both on an asset-weighted basis as well as an equal-weighted basis, and
depending on the model, from 1/2% to 1% on an annual basis.
So this is bad for the broker-sold funds
because we haven't even got to front-end charges that you're going to be paying.
Maybe back-end load charges you may be paying and also the higher 12b-1
fees because remember these returns aren't subtracting out the 12b-1 fees.
It's looking at the gross return minus some annual management expense, but
it's not subtracting out the 12b-1 fees.
So now let's dig more into the differences in expenses.
So let's start out, let's just focus on the asset-weighted averages, and
we're comparing directly-sold funds with broker-sold funds and, in particular,
interested in the difference between the two.
So let's look at the annual nondistribution expense.
So another way of saying this is the annual expense that's a management fee,
but doesn't account the 12b-1 annual expense that's the distribution cost,
the part that's going to, usually, the broker.
You see here, the expenses are very similar, 0.7% for
the directly bought and the broker bought funds, okay?
Where the big difference emerges is in these annual distribution expenses,
the 12b-1 fees.
This is kind of, hey, one way that the broker can get paid.
For directly bought funds, your annual expense is basically 0, it's 0.02%.
For the broker-sold funds, it's almost 1/2%, that you're basically losing
from your pocket that is generally going to the broker through these 12b-1 fee.
So you see this difference of almost 1/2% that you're paying higher fees
through the broker-sold funds as opposed to the funds you bought on your own.
How about looking at front-end and back-end loads and again,
this is a sample 1996 to 2004.
Later in this module, we'll talk about trends and
expenses in the mutual fund industry.
But this is based on the academic work of Bergstresser, Chalmers, and
Tufano looking at sample 1996 to 2004.
Look at front-end loads.
For the average directly bought fund, the fund that you buy directly from,
let's say Vanguard or Fidelity for example, where asset weighting when coming
up with this average, the average front-end load is 0.4% of assets.
So that would be if you buy $100 worth of mutual fund,
you pay $0.40 on average as a front-end load.
So you're left with $99.60.
The average front-end load for the funds you buy through a broker, that's 3.6%.
So that means you invest $100, right off the bat you're
left with kind of roughly $96.40 because you're paying
this $3.60 right off the bat as a front-end load charge.
So that leads to lower performance.
Obviously net of all the fees for the broker-sold funds.
And then how about back-end loads,
this is the percent of the assets that you pay when you cash out your funds.
For funds you buy directly from the company it's 0, for
those you buy from the broker it averages 1.1%.
Okay, so you sell a $100, you lose a $1 in terms of this back-end load.
So this is pretty compelling evidence.
Del Guercio and Reuter, in their 2014 study, also find a big difference between
the after-fee performance of directly-sold mutual funds and broker-sold funds.
Again, their focus is in actively-managed stock funds.
What were some of their conclusions?
After fee fund returns.
So returns after you pay all the annual expenses.
Both, the management fee and the 12b-1 fee are an average 1.4% worse
on an annual basis for the broker-sold funds relative to the directly-sold funds.
And you may say, well this is just a raw return,
this is a raw return difference not accounting for differences in risk.
Well if you use a 4-factor model to count for differences in risk, the after fee
fund returns for the broker-sold funds and the directly-sold funds, it's 1.2%.
So controlling for risk doesn't seem to make that big of a difference.
So what's kind of of some of the bottom line from the academic research,
broker-sold funds charge considerably higher fees than funds you can purchase
directly from the fund company.
Particularly, in terms of the annual 12b-1 distribution fees, and
potential front-end loads.
This really shouldn't be surprising, right?
Because the broker or the financial advisor needs to get paid, right?
And this is coming through the higher fees, okay?
Now since broker-sold funds do not perform better than directly-sold funds
before the 12b-1 fees and the front-end loads they are taking into account, they
certainly underperform once we analyze the performance after all these fees, okay?
So at this point, I'm hoping an angry mob of brokers and
financial advisors is not waiting for me.
I envision a scene like this where I'm playing the role of the village
doctor here.
And here are all these brokers and
financial advisors like coming to kind of yell at me or maybe do worse.
Or I see this,
imagine this scene from photo taken from the Boxer rebellion here in China.
People that don't look very happy with the current situation.
So I want to be sure and highlight for you viewers and learners
that just to consider both the costs and benefits of financial advisors, okay?
Some of the academic work I just presented is highlighting some of the costs in terms
of higher fees and directly bought funds.
But remember financial advisors offer substantial benefits to households,
such as getting households to start to think about financial planning,
getting people to save regularly,
encouraging diversification, thinking about asset allocation.
Like maybe you should be a 100% in cash or a 100% in stock.
Considering the tax efficiency, okay?
Like, hey, maybe you have these losses in your portfolio, maybe you should sell
those assets before the end of the year to get a tax deduction.
So these are the various benefits that financial advisors could be offering.
Households should simply weigh the costs and
the benefits when deciding should I do it myself or
should I kind of pay for the services of a financial advisor.
That's no different than any other transaction.
Hopefully you're thinking about both the costs and the benefits.
So when we see this angry mob, hopefully it can kind of back off.
I'm just trying to bring a full picture for
people to consider when they're deciding how to plan for their financial future.
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