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harpgirl555

Growth of 10K according to Morningstar

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I'm trying to get a better understanding of the effect of load on investment returns. In particular I took a look at a fund that was chosen for me by a vendor: American Funds 2045 target Date Retire A: https://www.morningstar.com/funds/xnas/aahtx/quote.html 

I know it was a terrible choice considering that it is Class A fund with 5.75% load and an expense ratio of 0.72%. 

When looking at a growth of 10K over 10 years shown on Morningstar Report, I want to understand whether the 10K was invested before the 5.75% was deducted or after. When comparing to Vanguard Target Retirement Fund 2045, American Funds actually appears to be a better option: 

Vanguard growth of 10K over 10 years: $31,115

American Funds growth of 10K over 10 years: $32,115

Question: Is 10K invested before the 5.75% was deducted or after ?

Is anyone familiar with how Morningstar figures this out?

 

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Try using Vanguard’s “Compare Fund Costs” tool. https://personal.vanguard.com/us/FundsCostCompare

You start out comparing a Vanguard TR 2045 fund with an American Fund’s TR 2045 fund. It compares the costs over a period of time you select, and an assumed rate of return that you select. The class of the AF TR 2045 fund the tool uses does not have a load, but scroll down on the result page and correct the load to 5.75% and the ER to 0.72%. Using 10 yrs and 6% rate of return and a 5.75% load, I found that the AF fund would have to earn 6.92% (rather than 6%) to have the same return over 10 yrs.

The AF website shows the TR 2045 fund’s return either based on its NAV, and also including the load: https://www.americanfunds.com/individual/investments/fund/aahtx  

You can compare those returns with those of the Vanguard TR 2045 fund and I think it’s clear that the AF TR 2045 fund has underperformed the Vanguard TR 2045 fund.

Does this help?

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On 4/10/2019 at 4:18 PM, harpgirl555 said:

Question: Is 10K invested before the 5.75% was deducted or after ? Is anyone familiar with how Morningstar figures this out?

 

I didn’t answer your question did I? Morningstar says that the Growth of 10K graph does not take loads into consideration. I couldn't find anything about whether the Growth of 10K table in the Performance section used loads or not. I think it's highly likely that loads are not used there either. 

http://www.morningstar.com/InvGlossary/growth_of_10000_definition_what_is.aspx

“The returns used in the graph are not load-adjusted.”

I'm impressed with the Vanguard tool for comparing the costs of 2 funds. You can control the inputs, loads included. It tells you the percentage of outperformance needed by the higher cost fund in order for it to equal the performance of the lower cost fund. And you can compare the result over time using a load or not. 

 

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I'm not sure exactly how Morningstar does things---I think they adjust for expense ratios, but not for loads. Don't trust me though...I'm sure their methodology is buried somewhere on their website.

Since you're asking questions about expenses, I figured I'd start by cutting right to the chase...you're going to want to purchase total market index funds that have minimal expenses (no loads and rock bottom expense ratios).

On 4/10/2019 at 7:18 PM, harpgirl555 said:

When looking at a growth of 10K over 10 years shown on Morningstar Report, I want to understand whether the 10K was invested before the 5.75% was deducted or after. When comparing to Vanguard Target Retirement Fund 2045, American Funds actually appears to be a better option: 

I understand that you're trying to look at past performance as a way of assessing the quality of a fund and its likelihood to perform well in the future. That is an entirely natural instinct, but in this particular domain, this form of analysis isn't helpful (actually it is more likely to lead to you selecting a fund that will under-perform in the coming years).

This is the bottom line...the data shows that roughly 1/3 of funds will beat in the market in any given year, but that it is exceedingly rare for a fund to consistently outperform the market year after year. A few funds have consistently outperformed the market, but it is my opinion that they were probably just lucky. If millions of people flip a coin over and over again, you're going to find some folks who flipped heads every time, but it doesn't mean they were skillful. Regardless if it is luck or skill, I know for a fact that I have no way of differentiating the lucky ones from the skillful ones, which means I'm far more lucky to pick a lucky one whose luck is set to run out.

This reality was best illustrated in 2005 when John Bogle reviewed the performance of the 355 mutual funds that existed in 1970 only to find:

  • 223 funds (62.8%) were closed before 2005.
  • 60 funds (16.9%) lagged the market by 1% or more.
  • 48 funds (13.5%) were within +/- 1% of the market.
  • 15 funds (4.2%) beat the market by 1-2%.
  • 9 funds (2.5%) beat the market by 2% or more.

Now you may be tempted to conclude that the roughly 10% of funds that beat the market over those 35 years MUST be skillful. Well, when you look into the data you'll find that quite of those funds owe their overperformance to a period of early dominance and they've now underperformed for more than a decade. It's my opinion that if you could take time to infinity, rather than 35 years, you'd find that nobody could beat the market.

...I suppose all of that is to say, past performance doesn't predict future performance.

On 4/10/2019 at 7:18 PM, harpgirl555 said:

I'm trying to get a better understanding of the effect of load on investment returns.

I've got an Investing 101 page that links to a spreadsheet I use to see how loads and expense ratios affect returns.

Others have slightly different opinions, but in my view the best way to understand fees is to ask yourself what percentage of your inflation adjust profit has the fee taken away from you. For example, suppose:

  • Inflation is 3%.
  • Your portfolio would have returned 6% in the absence of fees.
  • The fees actually consumed 1.5% of your investment.

Well, after inflation your return is down to 3% and if you lose another 1.5% to fees, then fees have consumed 50% of your real returns. That's a big deal!

So in your particular case, you've got a 0.72% annual fee and a 5.75% sales load. Let's assume 3% inflation, 6% annual returns, and a one time annual investment at the start of each year. You can probably see that if your real return is only 3% and the sales load alone is almost double that, then for the first few years your wealth is actually going to shrink! In fact, five years have to pass before you break into positive territory:

  • After 5 years the fees consume 90.44% of real returns.
  • After 10 years the fees consume 61.75% of real returns.
  • After 15 years the fees consume 51.6% of real returns.
  • After 20 years the fees consume 46.76% of real returns.
  • After 25 years the fees consume 44.19% of real returns.
  • After 30 years the fees consume 42.8% of real returns.
  • After 35 years the fees consume 42.11% of real returns.
  • After 40 years the fees consume 41.87% of real returns.

Compare that to an index fund that charges 0.04% per year and doesn't have a sales load:

  • After 5 years the fees consume 1.39% of real returns.
  • After 10 years the fees consume 1.46% of real returns.
  • After 15 years the fees consume 1.53% of real returns.
  • After 20 years the fees consume 1.6% of real returns.
  • After 25 years the fees consume 1.68% of real returns.
  • After 30 years the fees consume 1.76% of real returns.
  • After 35 years the fees consume 1.85% of real returns.
  • After 40 years the fees consume 1.94% of real returns.

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