Fidelity Investments introduced two mutual funds last month that cost investors nothing. One is focused on U.S. equities and the other on international assets. This is not a gimmick. The funds have already attracted almost $1 billion. The move was the latest salvo in a rapidly escalating fee war in the money-management industry. But let’s not declare the death of funds with high sales loads and other fees just yet.
I am strongly in favor of lower fees, just like any rational person. This is simply capitalism doing what capitalism does. Consumers should benefit, especially with all those studies about how fees eat into returns over time. I am also in favor of money managers earning enough to make what they’re doing worthwhile so as to preserve a wide array of consumer choice. People should be able to have more kinds of peanut butter than just Skippy and Jif.
Sort of lost in the whole discussion about expense ratios is that there are still a lot of mutual funds that charge significant sales loads, usually to pay for marketing and distribution. One might ask why someone would pay 4.5 percent off the top with no discernible difference in the quality of a fund. But fees on investment products can actually be good. Sometimes, such as with high commissions on stock trades, the sales loads ensure that investors are much less likely to churn their funds if they have to pay 200 to 500 basis points each time they want to get in or out. Fund companies will often drop the sales charge if investors switch between funds within the same complex, but most investors don’t often switch. They will hold a fund forever — usually to their benefit.
With the exception of Warren Buffett, the evidence on buy and hold investing is somewhat mixed. Based on my own experiences, investors who held a somewhat narrow portfolio of individual stocks for a period of decades have done the best. Out of any basket of 30 or so marquee large-cap companies, there is bound to be one Apple Inc. or Amazon.com Inc. These investors took a long view, partially because they were customers of a full-service brokerage and were too cheap to pay commissions on continuous stock trades.