July 31, 2010
For years now, I have read that the reports of ROI by the various mutual funds are not a reflection of their true returns to fund holders.
One type of problem is that individual investors tend to buy and sell their funds in an inopportune fashion (e.g., buy at a higher price when the market is rising, and selling at a lower price when the market is falling). There is nothing that can be done about the resulting disparity between the reported versus actual ROI for an individual in such cases. I mention this because this is NOT the problem that I wish to see addressed.
Rather, mutual funds often do not include in their ROI data (1, 3, 5. 10 years) such matters as trading costs, excessive costs resulting from high turn-over in portfolios, 12b charges, etc. I am not expert enough in the ways in which such exclusions from stated ROI work. However, it ought to be the case that, where an individual investor buys and holds a fund for a number of years, that his or her returns will match those reported by the fund as ROI. Departure from the stated ROI due to these excluded costs ought to be the basis for some form of sanction, and publication of the discrepancy by the SEC or other regulatory body.
Anything that you can do to eliminate such problems in reported versus real return in mutual fund will be a great service to investors. Perhaps the folks at Morningstar in Chicago would be a good source of suggestions on how best to address this problem.