Fund Authority Scores range from -10 to +10 and measure five factors for diversified stock or equity investment funds: 1) annualized management and sales expenses, 2) trading costs, 3) historical performance, 4) fund maturity, and 5) operating efficiency. Go to Part 2 –>>
This article explains how Fund Authority Scores rate stock or equity mutual funds and ETFs on the economic factors that most influence long term diversified stock investment fund performance. Part 2 discusses how historical performance is measured. Part 3 discusses the investment fund maturity and operating efficiency factors.
For an overview of what Fund Authority Scores mean, see the article: The Fund Authority Score – A better mutual fund and ETF rating system. You can find a directory of Fund Authority Scores for mutual funds and ETFs here.
FACTOR 1: Annualized Investment Management Expenses and Sales Load Fees (-4 to +4 points)
Combined, portfolio management expenses, sales load fees, and marketing fees account for 40% of the overall Fund Authority Score for a particular stock mutual fund or ETF.
First, a total annual direct ETF or mutual fund expense percentage is calculated. This total annualized expense figure combines: – the management expense ratio and any marketing fees (e.g. 12b-1 fees) – the annualized cost of any front-end sales loads amortized over 5 years *
* Note that for investment funds with sales loads, we develop Fund Authority Scores using Class A shares, which emphasize front-end sales loads. Brokers selling loaded investment funds may also offer alternative share classes with different mixes of sales loads and annual management fees. Such Class B shares and Class C shares may involve higher annual fees and/or deferred sales loads instead of front-end sales load charges. Because Class A, B, and C shares tend to be priced with rough equivalence from the selling broker’s point-of-view, the Fund Authority Scores for Class A shares are a good indicator of equivalent Fund Authority Scores for Class B shares and Class C shares. (See this article: Understanding one-time investment fees, such as sales loads)
(For more background on these important cost factors, see the articles in this category: Controlling Investment Costs. In particular, read The heavy burden of recurring investment fees and Pay less to get more)
Next, these combined annual management expenses and annualized sales load costs are rated using the following point scale. A stock ETF or mutual fund can score from -4 [...]