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New York Discovers Wall Street Charges Fees

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Re: New York Discovers Wall Street Charges Fees

#71

Post by jib »

grmarcil wrote: post #36
astazangasta wrote: post #24

Earlier quoted context omitted.

Orly? So you're OK with paying an extra 1% above the market rate on your mortgage? Because that's the kind of thing you're talking about. 1% a year will eat quite a lot out of your retirement over 40 years. I.e. 40%.

The public market funds outperformed their passively managed benchmarks, even considering the management feeds paid. To continue your mortgage comparison, New York is paying a real estate professional a certain percentage of money to find them a better deal on their mortgage, and NY still gets a better rate going through them after their fees are paid.

Except with a mortgage you're not running a risk that next year you will suddenly have an extra 50k added to your mortgage.

Actively managed money has a very nice angle going. They can charge money to actively manage your funds, while still getting to keep a share of any profits generated.

Insurance companies have to pay money to get access to the same funds, to do the same gambling.

It is somewhat insane that you can run a business where the choices are:

a) Do admin work to balance an indexed portfolio for price A b) Gamble with money for price (B + X% of profits)

And somehow people feel its ok that the price of B is higher than the price of A.

Re: New York Discovers Wall Street Charges Fees

#72

Post by dlubarov »

sillysaurus3 wrote: post #5
rodgerd wrote: post #2

> In a competitive market for investment performance, managers should charge fees equal to their outperformance. Then what's the value in a fund manager instead of a simple algorithm that follows the market? Would you hire an employee and pay them the entirety of the value they generate for your business? What a preposterous argument.

It's difficult to follow a market without losing money. I tried once, which was enough to learn that much. The market generally has been growing for a long time, with 2008 being a notable exception. If you've been growing money at market pace, then historically you've been doing pretty well.

How come? Wouldn't you have a very low turnover rate since you'd generally only buy during new offerings, and not trade at all in response to valuation changes?

Re: New York Discovers Wall Street Charges Fees

#73

Post by hkmurakami »

jib wrote: post #70
jevgeni wrote: post #64

Earlier quoted context omitted.

But they aren't buying index funds..?

The argument is they are gambling with just a downside, so why are they not just buying indexed funds, right? If you lose money on actively managed funds, you lose the money. If you win money on actively managed funds, you get a small part of the win, and give away a large part of the win to the guy who was gambling (how large is clearly a contract question). If the part you give away is too big, you are playing a fo…

The article suggests that the fees were comprised of management fees only.

This is a common structure for "long only" management funds that limit their exposure to public equities and are under significant restraints in how "creative" they are allowed to be.

Re: New York Discovers Wall Street Charges Fees

#74

Post by maest »

jib wrote: post #70
jevgeni wrote: post #64

Earlier quoted context omitted.

But they aren't buying index funds..?

The argument is they are gambling with just a downside, so why are they not just buying indexed funds, right? If you lose money on actively managed funds, you lose the money. If you win money on actively managed funds, you get a small part of the win, and give away a large part of the win to the guy who was gambling (how large is clearly a contract question). If the part you give away is too big, you are playing a fo…

> Why pay someone to gamble for you if he will take 95% of the winnings but not eat any of the losses?

From the article:

> So for instance in U.S. equities the funds got annual returns of 8.24 percent for 10 years, versus annual fees for U.S. equities of about 0.08 percent. So the funds got 99 percent of the returns on their investment, and the managers got 1 percent of those returns.

Re: New York Discovers Wall Street Charges Fees

#75

Post by smcl »

bmelton wrote: post #62
wodenokoto wrote: post #49

I'm a bit confused about what the author means when he says that managers should charge equal to the extra value they add to a portfolio. Why should I hire a manager that beats the market, he he charges the amount he beats the market with? Wouldn't that leave me of the same as simply averaging the market?

Because they aren't charging the amount they beat the market by, they're a percentage of that. In your example, you suggest that you could get $100 by using an index, but instead, you hire a guy who gets you $200 for not using an index, and then charges you the $100, and you're no better off. In the article, you could get $100 by using an index, but instead, you hired a guy who gets you $200, and then charges you a p…

Take the numbers you've used and switch them around slightly to reflect the NYC pensions situation and you can see why they'd be upset. It's not $4 in fees to an additional $96 returned to the client, it's $2billion in fees versus an additional $40m. Scaled back to your example that'd be like hiring a guy who gets you $200, keeping $98 for your $2.

Re: New York Discovers Wall Street Charges Fees

#76

Post by [deleted] »

bmelton wrote: post #62
wodenokoto wrote: post #49

I'm a bit confused about what the author means when he says that managers should charge equal to the extra value they add to a portfolio. Why should I hire a manager that beats the market, he he charges the amount he beats the market with? Wouldn't that leave me of the same as simply averaging the market?

Because they aren't charging the amount they beat the market by, they're a percentage of that. In your example, you suggest that you could get $100 by using an index, but instead, you hire a guy who gets you $200 for not using an index, and then charges you the $100, and you're no better off. In the article, you could get $100 by using an index, but instead, you hired a guy who gets you $200, and then charges you a p…

[deleted]

Re: New York Discovers Wall Street Charges Fees

#77

Post by alextgordon »

obstinate wrote: post #40
jcdavis wrote: post #31

Earlier quoted context omitted.

The 0.17% is only for the "investor class" shares, which starts at 3k. Invest 10k and you get "admiral class" shares which charge only 0.05%. At $5m you can get "institutional "which only charges 0.04%, and at $200m you can get "institutional plus" that charges 0.02%, which any big pension fund could have

That's really interesting. So you could put $200M of assets into a Vanguard fund and only get charged $40k/y for that. It seems like a very small number when you put it that way.

Which begs the question, how are they really making their money?

Re: New York Discovers Wall Street Charges Fees

#78

Post by roel_v »

jlebar wrote: post #53
oldmanjay wrote: post #23

Earlier quoted context omitted.

why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct. edit: typo

> why does the compensation need to be tied to the difficulty rather than the assets under management? you haven't actually made a case for that, just assumed it was naturally correct. Because in a competitive market, the price of a good is equal to its marginal cost? "Difficult" here is being used synonymously with "expensive".

OK, then why do the fund managers don't just move elsewhere? The flaw in your argument is that you assume that investment services are a commodity, which obviously they aren't, otherwise everybody wouldn't have to be frothing about how some managers make better returns than others.

Re: New York Discovers Wall Street Charges Fees

#79

Post by jib »

maest wrote: post #74
jib wrote: post #70

Earlier quoted context omitted.

The argument is they are gambling with just a downside, so why are they not just buying indexed funds, right? If you lose money on actively managed funds, you lose the money. If you win money on actively managed funds, you get a small part of the win, and give away a large part of the win to the guy who was gambling (how large is clearly a contract question). If the part you give away is too big, you are playing a fo…

> Why pay someone to gamble for you if he will take 95% of the winnings but not eat any of the losses? From the article: > So for instance in U.S. equities the funds got annual returns of 8.24 percent for 10 years, versus annual fees for U.S. equities of about 0.08 percent. So the funds got 99 percent of the returns on their investment, and the managers got 1 percent of those returns.

But the important part isn't annual return, it's annual return compared to similarly risked options. Which are in the 7-8% range for the last 10 years depending on when you start counting.

I'm paying you to beat the average - I can achieve the average myself, at a lower risk by just investing evenly across the board.

If the funds delivered 8.24%, and matching S&P would have gotten me 7.5%, then you're in fact keeping 15% of what you gambled for. And if you had delivered 7.0% I would have eaten that loss compared to the average.

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