ebook essays pieces of the puzzle
Tuesday, December 17th, 2013
fees and fees and fees

13 1217 zHSKAX

This chart shows the last four years of the J.P. Morgan Market Neutral Fund (HSKAX), with the total return appearing in the top panel and the total net assets of the fund in the bottom panel.

The description of the fund says it “seeks to provide long-term capital appreciation from a broadly diversified portfolio of U.S. stocks while neutralizing the general risks associated with stock market investing.”  Given that strategy, you’d want the fund to at least beat cash.  You can see it hasn’t been able to do so.

Given that underperformance — and the increasing desire to get market exposure — it is not surprising that there has been a dramatic decline in the assets of the fund.

This vehicle has been in existence since 2005 (the early years featured better performance), so it is almost a senior citizen compared to a lot of the “alternative” mutual funds.  Despite all of the performance action being in equities of late, the fund companies are adding lots of new alternative vehicles, increasing their sales teams dramatically, and marketing the funds like crazy.  Advisory firms are in a rush to play the game too, since clients think that they need alternatives.

What comes along for the ride?  Fees.  Big fees, usually.

Right now, the fees on HSKAX are capped at 1.75% (1.5% plus the 12b-1 fee); take that times four for a rough estimate of the bite out of returns from paying the fees during the period shown in the chart.  (Not counted is the 5.25% front-end sales charge to get in the door.)  But the true operating expenses are listed at 4% right now — and the expense cap is slated to expire in a couple of months.  Perhaps it will be extended, but don’t expect the fees to go down.

This is but one example.  There are scads of them.  The great rush into alternatives is built on the fees of investors who by and large are likely to be disappointed.  (Chart:  Bloomberg terminal.)

owners and renters

My latest essay on the flagship site examines the differences between owners and renters of stocks.  Either is a perfectly acceptable approach to the market, but beware those who pose as owners and are merely renters.  Their behavior (and chances for success) may surprise you.