Analysis of Motley Fool Independence Fund
analysis, mutual fund

An article in MarketWatch discusses a recent proposed change of from performance-based to flat management fees in Motley Fool mutual funds, such as the Independence fund (FOOLX). According to the article, back in 2009

…the firm created its funds with “fulcrum fees,” a performance-based standard that effectively pays management more when it exceeds expectations and beats the benchmark, but that reduces fees when performance lags. That’s the ideal model for compensating a fund manager; they do better when they serve investors better, creating an incentive to deliver on their performance promises.

Due to regulatory issues (performance-based management fees are easy to miscalculate), the firm now intends to switch to an industry-standard flat-fee scheme. Apparently, this will also remove a “newbie penalty,” in which new investors in a fund after a period of outperformance pay higher fees without having realized greater returns.

Let’s take a look at the Motley Fool Independence fund from Alpholio™’s perspective to determine whether the original fee schedule resulted in a better performance. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for FOOLX

Compared to its dynamic reference portfolio of ETFs, which truly adjusts for risk, the fund had a largely flat cumulative RealAlpha™. In fact, the annualized regular RealAlpha™ of the fund was a negative 0.21% since inception. At about 13.7%, the annualized volatility of the fund was low compared to over 15% of the MSCI World Index, its primary benchmark. The RealBeta™ of the fund was about 0.94.

Here are the ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for FOOLX

The fund had top equivalent positions in the iShares Select Dividend ETF (DVY; average weight of 18%), Fidelity Nasdaq Composite Index ETF (ONEQ; 14.3%), iShares MSCI Canada ETF (EWC; 10.2%), iShares Latin America 40 ETF (ILF; 9.4%), iShares MSCI Hong Kong ETF (EWH; 9.1%), and SPDR® Dow Jones® Industrial Average ETF (DIA; 8.3%). The Other component in the above chart contains combined smaller weights of five additional ETFs. Cash and short-term investments of the fund were represented by the iShares 1-3 Year Treasury Bond ETF with an average weight of 4.9%.

In sum, despite performance-based management fees, the Motley Fool Independence fund delivered an unimpressive performance on a truly risk-adjusted basis. While the proposed switch from the “fulcrum” to traditional flat fee may improve the fee accuracy, it does remove a key incentive for the fund to improve upon these past results.

To learn more about the Motley Fool Independence and other mutual funds, please register on our website.


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Trust Goes Down, Fees Go Up
active management, financial adviser

InvestmentNews reports that an annual survey of retail investors by State Street found that only 15% (down from about 33% last year) of respondents trust financial advisers as a group. The key issues are: performance, unbiased and high-quality advice, and transparency. Apparently, investors…

…don’t believe the fees they’re paying are commensurate with the return on their investments.

Granted, the lack of trust is evidently coupled with a lack of understanding of the finance industry or a sufficient interest in investments. However, the chief issue of performance remains.

So, how to fix this problem? By increasing fees, of course. That is what Bank of America just did by planning to raise fees on its managed-account (flat-fee) platforms at Merrill Lynch.

The current minimum fee schedule for equities on the most popular Merrill Lynch Personal Advisor (MLPA) platform with $152B under management is:

Assets Under Annual Fee
$1M 1.00%
$2M 0.65%

The new rate schedule will be:

Assets Under Annual Fee
$250k 1.6%
$500k 1.4%
$1M 1.3%
$2M 1.0%

Therefore, MLPA clients will face fee increases of 54-60%. Over 14,000 ML advisers have to implement that change by the end of 2015; the only way to reduce the fee hike for clients will be to cut their own compensation. Naturally, ML advisers are worried. So should be the clients. Luckily, Alpholio™ can easily show these investors whether advisers earn their fees by generating a sufficient RealAlpha™ on the managed accounts.

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