Fund of Funds of Fees

The only thing worse than being talked about is not being talked about.
— Oscar Wilde

Apparently, some publicists have taken this quip literally. One in particular sent an e-mail encouraging me to interview her client, Dan Neiman of the Neiman Funds about his Balanced Allocation Fund. Rarely do I even read these notes, but this time I decided to see what was special about this product.

What I discovered surprised even me (and I’ve seen a lot). Neiman Balanced Allocation is a fund of funds. The fund doesn’t select its own stocks and bonds. Instead, they invest in other people’s mutual funds. In the process, you end up with fees from the fund in which you invest and fees from the funds in which the fund invested. 

Since higher fees have been shown to be detrimental to shareholders’ returns, you would think that an executive of an expensive fund would be reticent to talk with someone who tells his publicist “I plan to ask some tough questions about the funds’ portfolio and expense ratios and whether or not these meet the firm's fiduciary responsibilities to its clients.” Bravely or foolishly, Mr. Neiman scheduled the interview anyway. 

Before we get to the interview, let’s look at the Neiman Balanced Allocation Fund compared with a fund that comes as close to being a typical balanced fund, Vanguard Balanced Index:

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As you can see the Neiman balanced fund is more expensive, riskier, and has performed worse than the Vanguard balanced fund. So, why would anyone choose the Neiman offering. Neiman argues that using his fund is a better option than using an investment advisor who creates a balanced fund.

However, to use that argument, Neiman assumes that an investment advisor charges about 2% per year and uses expensive actively managed funds. I suggested that there are low fee investment advisors using no-load, low fee funds who could create a personalized portfolio for close to 1% per year.

Neiman’s response: “You could do that… the thing that you’re going to be missing is the actively managed portfolio…”

When I mentioned that the evidence shows that most active managers don’t have value, he agreed with me, but added, “…what we’re trying to do is choose those funds… that have a historical track record of reducing the risk in our portfolio.” 

After pointing out that his balanced fund has been rated as riskier than Vanguard’s balanced Index and yet has underperformed, he blamed the fund’s relative youth; “…we may have been late to the game in picking up some of those better-performing funds.”

As for Balanced Allocation’s higher risk, Neiman chose contradictory obfuscation; “On the risk side, we’ve cautious, (but) we’ve been taking more of a riskier approach into bonds than we maybe should have…”

He added. “…hindsight is 20/20…”

Yes, and no one has consistently accurate foresight. I pointed out the studies, once again, “…that showed active management outperforms less than 1% of the time when adjusted for luck.”

While Neiman found the studies fascinating he continues to believe that he offers a “solution for investors that want ‘best in breed’ mutual funds… that will, hopefully, outperform with less risk over the long-term.” So far, his results don't look so good:

Fees Matter. $10,000 invested on 12/31/2011 in Vanguard Balanced grew to almost $14,000 in three years, while $10,000 ended up worth over $2,000 less.

Fees Matter. $10,000 invested on 12/31/2011 in Vanguard Balanced grew to almost $14,000 in three years, while $10,000 ended up worth over $2,000 less.

Neiman’s self-delusion continued throughout the interview, as he continued to argue that, despite reams of evidence to the contrary, his firm’s brilliance will overcome the effect of outrageously high fees and somehow, eventually provide his clients’ with a market-beating returns with less risk. I argue that that is the “hope” of every active money manager.

To quote my grandmother, “Hoping doesn’t make it so.”

Listen to Dan Neiman interview on Talking Real Money podcast.

Fama/French Study: "Luck Versus Skill in the Cross Section of Mutual Fund Returns"

Barras/Scaillet/Wermers Study: "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas

Morningstar: "How Expense Ratios and Star Ratings Predict Success"