The Distorion of Expense Ratios in Australian Investment Funds

MGSM Working Paper No. 2005-35

30 Pages Posted: 5 Dec 2005

Date Written: August 2005

Abstract

Expense ratios are an important impersonal data source and one of the major factors influencing the purchase decision for an investor in an investment fund. Growth in Australian sourced investment funds has now eclipsed $1 trillion, with predictions that the whole market will compound by 12 percent per annum until 2014 (Rainmaker, 2004).

In this paper we catalogue the various type of relative fee disclosure used in Australian investment funds, and highlight some deficiencies in principle methodology used for fee disclosure, the management expense ratio (MER).

Due to inconsistencies in the way the MER is calculated between investment funds, we identify a distortion in fee disclosure that is present when the fund experiences positive growth in funds under management (FUM). Depending on the method used to calculate the MER, this distortion may have the effect of understating fees, and therefore misrepresenting the cost of investing in a particular fund.

We model the impact of our findings by using our Growth Distortion Model to simulate MER fee disclosures at various rates of growth in FUM across the industry. We also suggest a new framework for relative fee disclosure, the Performance Cost Ratio and identify areas of future research in this field.

Keywords: financial disclosure, investment fund, investment performance, management expense ratio

JEL Classification: M41, G23, G24

Suggested Citation

Finch, Nigel, The Distorion of Expense Ratios in Australian Investment Funds (August 2005). MGSM Working Paper No. 2005-35. Available at SSRN: https://ssrn.com/abstract=862944 or http://dx.doi.org/10.2139/ssrn.862944

Nigel Finch (Contact Author)

Saki Partners ( email )

Australia

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