Do "growth of $10k" charts for mutual funds account for fees? I've found conflicting information

Question

I've had several people advise me that the growth of $10k charts that you see for mutual funds, and provided by, e.g., Morningstar, account for the expense ratio of that fund (but not sales loads). So you can compare the performance of two funds with different expense ratios, and see how $10k would have performed if invested in those funds.

However, as I did some more research I found that Investopedia seems to say the exact opposite:

The returns shown in [a growth of 10k] chart include reinvestment of dividends and capital gains, but exclude fees and sales charges. ... Since it excludes fund management fees and other charges such as sales and redemption expenses, the growth shown is overstated, and the actual returns that would accrue to an investor would be lower than those shown.

First, let me say that I thought the "expense ratio" for a mutual fund was, or at least included "management fees" (Bogleheads Wiki seems to support this, and Investopedia says that the expense ratio includes the "fee paid to a fund's investment manager/advisor" and is also sometimes called the management expense ratio). So if the growth of 10k chart excludes the management fee(s), then it can't be including the expense ratio.

What's the straight scoop? Is Investopedia wrong? Am I missing some subtlety in the terminology? Is there a chart that's similar to a growth of 10k chart that does account for the expense ratio?

Answer 1

From the Morningstar website:

Total Return

Expressed in percentage terms, Morningstar's calculation of total return is determined by taking the change in price, reinvesting, if applicable, all income and capital gains distributions during the period, and dividing by the starting price.

Unless otherwise noted, Morningstar does not adjust total returns for sales charges (such as front-end loads, deferred loads, and redemption fees), preferring to give a clearer picture of performance. Total returns do account for the expense ratio, which includes management, administrative, 12b-1 fees, and other costs that are taken out of assets. Total returns for periods longer than one year are expressed in terms of compounded average annual returns (also known as geometric total returns), affording a more meaningful picture of fund performance than nonannualized figures.

(The Growth of 10k charts use total return to calculate the values shown.)

Answer 2

It depends on the group making the chart, of course, but the most common way is to include management fees but not sales commissions and charges, for the performance of a fund. It should be stated in the chart notes. Similarly, trading commissions and spreads are usually not included when comparing stocks and bonds.

Answer 3

The concerns raised by the OP might be due to a mis-interpretation of the various words used.

A load mutual fund has sales charges: the fee paid to the broker who invests your money for you. The sales charge usually is a percentage of the amount invested, and for some funds, this percentage might be smaller if a large investment is made. If an investor buys shares of a load fund directly on the mutual fund's web site instead, the load is still charged but in this case, the mutual fund keeps the money as extra profit for itself. For obvious reasons, load funds are popular among brokerage houses.

Some mutual funds have redemption charges, though these often are set up to reduce, and ultimately disappear, if the shares are held long enough. Many no-load funds also have redemption charges for shares held for less than some number of days (90, 180, etc) in order to reduce the temptation to trade frequently.

Many load mutual funds don't have sales charges for re-investment of dividend and capital gains distributions into the fund. However, a unscrupulous broker might well set up matters so that distributions are taken as cash into the investor's brokerage account followed by a quick phone call: "Your ___ Fund just made a distribution of $1788.23. Should I just re-invest it in the Fund, or do you want to invest it elsewhere?" thereby enjoying another gift that keeps on giving year after year because a sales load is charged on the re-investment. (Don't laugh; I know people whose brokers take them out to lunch every three months because they have this kind of deal set up; if I had a broker, he would not be taking me out for even a simple plain black coffee without sugar).

Some funds (even no-load stalwarts such as Vanguard) charge annual flat fees in the $20-30 range to shareholders whose assets are "small" (usually less than $10K).

All such fees and charges and loads are not included in the growth shown on "Growth of $10K" charts, and that's what Investopedia is saying. The mutual fund itself charges a fee (expense ratio, management expense ratio etc) to each investor as a fixed percentage of the assets, and of course when the fund buys and sells securities, it pays transaction fees for these actions. All of these costs are included in the results shown on the Growth charts but not explicitly included; they are hidden in the Net Asset Value per share that is shown.

So, yes, comparing "Growth of $10K" charts is reasonable as long as one understands what is being compared.