[Previous entry: "Updated index for: Commissions"] [Next entry: "Updated index for: Active v tracking"]

03/04/2005: "Updated index for: Cost wedge"

Costs kill
This summary of chapter 11 of No Monkey Business shows the different sources of investment cost, of which commissions are the largest and most discretionary part, and their impact on expected returns, expected risk premiums and hence the rationality of investors' choices. At the thin end of the 'cost wedge' are index-tracking funds. At the thick edge are funds with only a small chance of rewarding investors for taking equity risk. The cost wedge is inseparable from the issue of commissions and active funds vs trackers - each with their own topical index.

The cost wedge just got fatter
Several papers have recently reported the growing number of increases in annual management charges. This latest wave particularly affects funds combining equities with lower risk - and lower return - investments, increasing the chance of irrational selection by investors. The trend is ironically partly driven by investors avoiding front-end sales charges which means all actively managed funds have to rely more on trail commissions, whether the underlying real returns can suport their cost or not. Illustration of the cost impact for a personal 'balanced' pension fund shows that the cost of paying for advice by commissions is nearly 25% of potential fund value after 20 years of accumulation.

The Cost Wedge: an American perspective
An article by John Bogle, architect of one of the most successful US mutual fund groups, shows UK consumers are not alone in being ripped off by the investment industry just for trying to get our money to work in the equity markets. The exasperation of all decent professionals who understand this finds support in the radical core suggestion of the Turner Report on pensions: we need a public sector procedure for collecting savings and subcontracting management on tight terms if we are to prevent the Cost Wedge impoverishing retirees.