This week's answer comes from:

Norm Fosback

Norman G. Fosback is the most widely read independent provider of mutual fund advice in America. He recently founded Fosback Investment Management, which publishes a new investment advisory letter, Fosback's Fund Forecaster. From 1971 through 1998, Mr. Fosback was president and research director of The Institute for Econometric Research, where he created, edited, and managed ten investment publications, including Mutual Fund Forecaster, Market Logic, The Insiders, Investor's Digest, Income Fund Outlook, Fidelity Forecaster, Income Fund Outlook, and Mutual Funds Magazine, with a combined paid circulation of more than one million. Mr. Fosback is also author of the acclaimed best-selling book Stock Market Logic. Mr. Fosback also provides portfolio management services to individual investors. Mr. Fosback can be reached at nfosback@fosback.com.

How do fund expenses affect reported fund performance?

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How do fund expenses affect reported fund performance?

from Clark

Q: Scanning a mutual fund prospectus, I note they show:

12b-1 marketing fee 1.00%
Expense ratio 1.63%

Thusly, my question is, "Does the listed Expense ratio of 1.63% include the 12b-1 marketing fee of 1.00%?"

Second question: "If a mutual fund indicates past 12 month performance of 10% , would this figure be after all expenses have been considered ? What I'm asking is, in this example would the investor receive the net percentage of 10 %?"

A: All reported and published fund performances are after all fund expenses -- including 12b-1, management, and other operating expenses -- and therefore reflect the net returns earned by shareholders. They do not, however, reflect any initial sales loads or redemption fees, that you may have paid. If your fund reported a return of 10.00% and expenses of 1.63%, then its gross portfolio return before expenses was 11.63%.

Only the actual expenses incurred by a fund pursuant to its 12b-1 plan over the preceding twelve months are included in its published expense ratio. This may or may not be the maximum 12b-1 fee allowed under the fund's plan. In your example, the 1.00% 12b-1 fee is the maximum amount the fund may levy on its shareholders in a given year. Hence, if the fund you cite incurred only 0.90% marketing expenses under its 12b-1, then by subtraction its other expenses were 0.73%, making for a 1.63% total expense ratio.

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

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