Mutual fund investors are unwittingly paying more than $17.3 billion of undisclosed mutual fund costs per year, according to a new study released this week by Zero Alpha Group, a national investment advisory group. Trading costs proved to be a major factor in inflating hidden fund expenses that are undetectable to many investors.
"Only a part of that extra cost is detectable through publicly available documents, and that is only if you dig into obscure mutual fund documents that very few investors know anything about," said Scott Sarber, vice president at Petersen Hastings Investment Management . "When you add on top of that the completely unreported implicit costs of trading, you are left with a big credibility gap in mutual fund reporting to investors."
The report, which examined more than 5,000 domestic mutual funds in 2002, concludes that trading costs typically consumed 43.4% of each investments total annual expenses. In many cases, the actual trading costs for some funds were larger than the funds expense ratios.
Small-cap funds, 46% of which have "all-in" trading costs, comprised the largest group funds in which trading costs exceeded the total expense ratio. Approximately 21% of all mid-cap funds and 7% of all large cap funds were found to have the same problem.
Amazingly, in 17% of the entire fund survey group trading costs doubled stated annual expenses. Growth funds, as a group, were found to have above-average trading costs as a percent of annual expenses.
Index funds, which charged trading costs averaging .0064% per year, provided a clear basis of comparison for ordinary active funds typically charging 0.48% per year.