Good new commentary from Bill Gross of PIMCO making many points, but most entertainingly opining on the subject of fees. Of course, it is amusingly self-serving, given its implicit pitch for low-fee bonds, but that doesn’t make Bill wrong either.
Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio. Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game. Since money market funds barely earn 38 basis points these days, much of the return winds up in the hands of investment managers. A mighty expensive potion indeed. While some index and ETF proponents avoid this extreme absurdity with lower fees, roughly 90% of the $1.5 trillion in 401(k) and other defined contribution assets in mutual funds are in actively managed offerings with expenses close to 1%. Paying for those potions during an era of asset appreciation with double-digit returns may have been tolerable, but if investment returns gravitate close to 6% as envisaged in PIMCO’s “new normal,” then 15% of your income will be extracted based on the beguiling promise of Madame Rue.