Practical analysis for investment professionals
16 April 2014

Bogle on the Hidden Costs of Actively Managed Mutual Funds

Late last year, we talked to Antti Petajisto about how to find winners in actively managed mutual funds; he noted that the average actively managed mutual fund underperforms low-cost index funds. In the January/February 2014 issue of the Financial Analysts Journal, John C. Bogle discusses why researchers continue to find that active funds underperform index funds. In his article “The Arithmetic of ‘All-In’ Investment Expenses,” Bogle examined the expenses that contribute to the underperformance of active funds. Rodney N. Sullivan, CFA, head of publications at CFA Institute and editor of the FAJ, talked to Bogle about his research in an extended interview as part of our FAJ author interview series.

“For years and years — decades, really — the standard of comparing costs in mutual funds has been to take their total expense ratio, . . . but there are an awful lot of costs involved in mutual funds that aren’t in the expense ratio,” Bogle says. He wanted to give a full accounting of what the real total costs of mutual funds are, and in his article, he examined four expenses associated with active management: transaction costs, cash drag, sales loads, and tax inefficiencies.

Bogle says his research was inspired by an article by William F. Sharpe in the March/April 2013 issue of the FAJ, “The Arithmetic of Investment Expenses,” in which Sharpe examined expense ratios in low-cost and high-cost funds. Bogle notes that in addition to the 2013 article, Sharpe has published articles on fees and expenses in both the January/February 1991 issue of the FAJ and the January 1966 issue of the Journal of Business.

To hear Bogle discuss the background, results, and implications of his research, listen to the full interview (above) or download the MP3.

CFA Institute members can access Bogle’s full journal article on the CFA Institute Publications website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.


About the Author(s)
Pat Light

Pat Light was an assistant editor at CFA Institute. Before joining the CFA Institute editorial staff, he worked as a teacher. Light has a bachelor's degree in English from Duke University.

1 thought on “Bogle on the Hidden Costs of Actively Managed Mutual Funds”

  1. Ashleyjohn says:

    Excellent blog ! Thanks for sharing the information. It’s great advice on mutual funds. I look forward to read more.

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