What some fund managers don't want you to know

Posted at 06/01/14 5:54 PM

MANILA, Philippines - Thanks to mutual funds those who don't have time to watch the market can still participate in the returns equities provide.

But one problem is fees.

Observe closely when someone is selling investments in a mutual fund. They will talk about historical returns, and in the same breath, say these are not guaranteed returns. They will talk about management and peso cost averaging.

But they hardly talk about fees.

If and when they do, they will gloss over those numbers. You need to learn to ask the right questions to get a good answer.

Some mutual fund companies do not even disclose their fees prominently on their website.

You have to download their lengthy prospectus written in hard-to-understand legalese and wade through all the information to find out how much you are actually paying in management fees.

A solution could be to standardize the information presented in the prospectus. This will prevent fund managers from hiding other costs.

In general, UITFs are better are disclosures off fees than mutual funds in the country. You have to go deep into their websites to find numbers.

Compared with mutual funds, UITFs offer better diclosures.

For some companies, if you don't look at their prospectus closely, you won't realize that you're also paying sales load fees and incentive fees. These hidden costs can pare down your returns over time tremendously.

Management fees of mutual funds and UITFs in the country range from 0.25 percent to 2 percent per year of your total investments.

If you think that's small, you're dead wrong.

Two percent of your total investment per year can be a big sum of money over time.

In general, peso money market funds and bond index funds, charge the lowest fees. After all, most of the short term money market funds are just placed with the Bangko Sentral.

Curiously, index funds in the Philippines charge expensve fees, a sign that they are actively managed.

Equity funds and gold dollar funds charge fees that are close to the 2 percent mark. What's interesting are redemption fees, they can be very steep at up to 5 percent of the amount if you take out the money before the holding period.

Fortunately, some mutual funds and UITFs don't charge redemption fees.

Other hidden fees include front loads, back loads and sales loads which can go up to as high as 3 percent.

It is absolutely critical for you to consider the cost of investing. This is why we all need to be more discerning of the fees.

Index funds

One way to avoid these fees is to harness the power of indexing.

Well-known American businessman Charles Schwab said that for 98 percent of Americans "low cost, diversified funds that track indexes are the way to go."

In fact, Warren Buffett has recently announced if his wife survives him, 90 percent of the inheritance will be placed in the Vanguard Index 500 Fund.

"Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and for investors, in aggregate, devoid of benefit," Buffett said.

"So ignore the chatter, keep your costs minimal and invest in stocks as you would in a farm."

Clearly, costs hould matter to you. They should be significant to your investment philosophy.