 Personal Finance PowerPoint Presentation Management Fee Prepare to get financially fit by practicing personal finance Most of this information comes from Investopedia Management Fee, which you can find online Take a look at the references, resources, continue your research from there This is by James Chen, updated March 4th, 2021 In prior presentations, we've been taking a look at investment goals, strategies, tools Keep in mind the two major categories of investments That being the fixed income, typically bonds And the equities, typically the stocks Also keeping in mind tools that you might be using for investments such as mutual funds and ETFs Possibly helping you to diversify, possibly with less investment to do so As opposed to investing in individual stocks, individual bonds Keeping that in mind, we're asking the question, what is a management fee? A management fee is a charge levied by an investment manager for managing an investment fund A management fee is intended to compensate the manager for their time and expertise for selecting stocks and managing the portfolio So obviously when we're having someone manage the portfolio, possibly with a fund, possibly something like a mutual fund Then there's going to be a management fee, typically there's going to be some kind of management fee And then the question is, well how much will that management fee be? Remember that as you're thinking about your investments, you're thinking the more that you're giving someone leeway That would be the general idea to be picking and choosing what they're going to be investing in, in an attempt To beat the overall market, you would expect the management fees to generally be higher The more you restrict a manager to be executing or having their decision process in a specific area Like a specific sector, for example, you would think the management fee might be lower in that case And if you feel that you're going to invest in the market overall and you want to reduce management fees a lot Then in general, you might be thinking that you're going to try to tie the management to something like an index So that although there will still be a management fee, they're kind of tied to investing in a certain manner Along with an index, which is kind of like an average of the markets for us to get an idea of each individual sector, for example So it can also include other items such as investor relations, IR expenses, and the administration costs of the fund Management fee explained, the management fee is the cost of having your assets professionally managed So if you have them professionally managed, that would imply that you're going to have your assets in a situation where you're giving more leeway possibly to the manager Oftentimes to invest in such a way with the hope that they have the skill to do so to basically outperform the market Remember it's a little bit risky to do that because oftentimes when you think about and you look at track records For people that are investing or managing, then they might have a good track record over a fairly short period of time But really you can't really tell what someone's overall track record is until basically they've retired Because you might end up in a situation where the manager has either an aggressive or possibly a non-aggressive style Which happened to just meet the needs of the market, fit perfectly at this time frame And their management strategy worked quite well at that time, but the question would be well what happens when the environment changes Where it would be better to not be that aggressive or better to not be that non-aggressive within the market You can't really tell that again until after the career is over oftentimes So a lot of times some people would argue maybe that you might want to invest on the market as a whole And in that approach you're trying to reduce the management fees and just basically bet on basically the market overall generally So those are just some concepts that keep in mind that are tied to in some ways the management fees So the fee compensation professional money managers to select securities for a funds portfolio and manage it based on the funds investment objectives So management fee structure vary from fund to fund but they are typically based on a percentage of assets under management The AUM for example a mutual funds management fee could be stated as 0.5% of the assets under management So when you're thinking about mutual funds remember what that means is instead of investing in individual stocks You're investing in a fund and that fund then is pooling your money along with other people's money And then you're going to need a manager in order to manage that fund The manager could have more leeway where they're trying to invest in such a way that they have the ability to do what they want in general Depending on the fund type or you could try to restrict the types of funds that you are investing in So that the manager has less leeway but they still need to manage the general fund activity Wide disparity in management fees So management fees can range from as low as 0.10% to more than 2% of AUM This disparity in the fees charged is generally attributed to the investment method used by the funds manager The more actively managed fund the higher the management fees that are charged For example an aggressive stock fund that turns over its portfolio several times a year in search of profit opportunity costs Much more to manage than a more passively managed fund such as an index fund that more or less sits on a basket of stocks without much trading So it depends on your investment strategy if you're saying if you're more of an aggressive strategy and you're saying Hey I think I can get into a fund that can do better than the market I believe in the fund managers being able to outperform the market even after the fact that I'm going to have to be paying higher fees in order to do that Then you might go and give more leeway and give more aggressive funds in order to outperform And when we say outperform we're often thinking of outperforming like the indexes, the averages, the market as a whole Which you can think of these indexes as kind of taking a representative pool, a sample for example of the stocks in a similar way as you might do Like for a voting sample to determine people's overall sentiments and that sample then is going to give us the idea So we might just bet on the averages, the indexes and that would be restricting a lot than the fund managers So are high management fees worth the cost? Active fund managers rely on inefficiencies and mispricing in the market to identify stocks that have a potential to outperform the market So then the question is should I pay for an expensive fund manager? Is it worthwhile? And obviously when you look at things like the stock channels like a Bloomberg or something like that and the interview management investment fund managers They're usually of the opinion that yeah they can do that because that's their job, right? So they're going to give you their opinion on how they think they can basically beat the market Other people have other opinions that might say that hey if you're a long-term investor that they have doubts That a fund manager is going to be able to outperform the market in the long run at least in such a way that they can clear basically the index or the market averages So it really kind of depends on your theory of the market as to whether a fund manager can manage in such a way that they can outperform the market enough to clear the fact that you're going to have to pay for their higher active management costs As opposed to investing in the market as a whole or in general by picking like averages like indexes and having the lower management costs So however the efficient market hypothesis has shown that stock prices fully reflect all available information and expectations So current prices are the best approximation of a company's intrinsic value In other words if you think of it from a market perspective from an economic perspective We usually think that markets are more efficient than other types of a top-down managed kind of system for example And because the market has been gotten pretty good at delivering information readily and quickly such as getting the financial statements out there Everybody has information to them so there's not like a disparity a big disparity at least of information And that would mean that you would think that the markets would move fairly quick to equilibrium You would meaning in general you would think if all the information is out there even though every individual investor is just not the smartest person in the world They all have their flaws the market as a whole would go towards equilibrium if they were efficient if all the information was out there If you believe that that's true then you're probably going to lean more towards wanting to invest in index funds because you're going to have some doubts And I kind of lean towards this side of things generally I'm going to have some doubts as to whether there's a genius market manager that can always outperform the market all the time Not to say that there's not value in looking at the market and judging things but that would be where you're leaning towards Or if you think there's inefficiencies in the market or a miss leveling of information meaning the big market managers for some reason have more information that gives them You know they get it faster or something like that and advantage then you're probably going to be leaning towards wanting a managed fund more active management So this would preclude anyone from exploiting mispriced stocks on a consistent basis because price movements are largely random and driven by unforeseen events So if you have to believe in efficient markets you would think that you couldn't have one person all the time beating the market there because you would think that everything is efficient generally Therefore the EMH implies that no active investor can consistently beat the market over long periods of time except by chance And notice there's a lot of interesting kind of scams out there where market managers will try to prove their reputation or by basically almost by chance Right because you even by chance you're going to have some people that just you know even if they didn't know anything more they just came out on top just by chance Because you have millions of investors right so someone's going to look like a genius even if they're not a genius sometimes just just by random It's kind of crazy but again according to a decades of Morningstar research high cost activity managed funds do tend to underperform low cost passively managed funds in all categories So research by Noble Laureate William Sharp has shown that after cost the return on average activity managed dollar will be less than the return on average passively managed dollar for any time period Sharp concluded that active fund managers underperform passive fund managers not because of any flaw in their strategies but because the laws of arithmetic in order to act in order for active fund managers to beat the market by just 1% They would need to achieve an excess return of more than 2% just to account for the average 1.19% management fee so they have to clear the management fee they got to beat the market by a fairly significant margin to beat the fee that they're going to charge So hedge fund management fees, hedge funds charge notoriously high fees that have become controversial as performance has often lagged the market Their fee structure is commonly referred to as quote 2 and 20 in quote because it consists of a flat 2% of total asset value and 20% of all profits earned Though the plan is often criticized it has been the norm since Alfred Winslow Jones founded what is often considered the first hedge fund the A.W. Jones & Company in 1949 As competition has increased and investors have become discontent the standard has come under pressure causing managers to often implement lower fees, performance hurdles and clawbacks if performance is not met