Missing from the letters was my argument: that Malkiel's point is moot because fund investors do not pay too much for investment advice. I'm going to beat that horse for a second time. Despite overwhelming evidence that fund investors are buying low-cost funds, and that fund investors are notsquandering their collective monies on expensive purchases, this horse is very much alive. And still kicking.
In 1993, net cash flows into the very cheapest segment of United States diversified-stock funds, defined as those with annual expense ratios of less than 0.25%, were $4 billion. With total inflows into US diversified-stock funds being $50 billion, this meant the lowest-cost funds accounted for 8% of the action. Last year, in contrast, the cheapest band was the only game in town. In 2012, US diversified-stock funds with expense ratios from 0% to 0.25% attracted inflows of $29 billion. Every other price segment suffered outflows.
Note that this calculation is for mutual funds only. The effect would be more powerful were I to include exchange-traded funds, which barely existed 20 years ago.
For international-stock funds in 1993, funds with expense ratios of less than 0.25% represented 0.02% of net inflows. In 2012, the figure was 28%. With balanced funds, the cheapest group was less than 1% of 1993 inflows, but 38% of 2012 inflows.
I guess this is one of those things that I'll need to keep writing. The marketplace appears to have a powerful need to believe something other than reality.
Read John Rekenthaler's previous articles here.
