Navigate Fund Solutions has released a new white paper that examines the avoidable structural costs of actively managed mutual funds and their impact on fund performance.
Navigate is a wholly owned subsidiary of Eaton Vance Corp formed to develop and commercialise NextShares exchange-traded managed funds.
As described in the paper, the performance of actively managed mutual funds reflects significant fund costs in addition to manager fees, asset custody charges and the cost of portfolio trades to implement managers' buy and sell decisions. These added costs include embedded fund distribution and service (12b-1) fees, transfer agency (TA) fees, the trading costs funds incur in connection with shareholder inflows and outflows, and the effect on fund performance of not being fully invested (cash drag). The paper quantifies these costs for the universe of actively managed equity mutual funds available to retail investors in the US over the period 2007 to 2013.
Annual 12b-1 fees averaged 40 basis points on an equal-weighted basis (EW) and 15 basis points asset-weighted (AW). Annual TA fees, flow-related trading costs and cash drag together averaged 65 basis points EW and 63 basis points VW. The white paper asserts that these costs could be substantially avoided by moving to a more efficient fund structure. Adjusting realised fund returns to remove avoidable structural costs, 55% EW and 65% AW of actively managed fund shares benchmarked to major US equity indexes outperformed the corresponding average of index exchange-traded funds over the seven-year study period, a significant improvement over fully burdened active mutual fund performance.