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MUTUAL FUND EFFICIENCY AND PERFORMANCE

Recognising that significant levels of investment are required to make the transition to a low carbon economy, the Capital Markets Climate Initiative (CMCI) was launched by the UK Minister of State for Climate Change, Gregory Barker, to help accelerate the response to this financing challenge by supporting the scale up of private finance flows to developing countries. The CMCI will be working with policymakers in developing countries to understand why and how public sector action can help mobilise private capital and encourage new markets in low carbon investments. This will focus on the role of “investment grade” policy, including public. | dows.com 358 US Route One Falmouth Maine 04105 207.878.3000 800.578.9981 info@dows.com DOW PUBLISHING COMPANY Sound advice for generations MUTUAL FUND EFFICIENCY AND PERFORMANCE The primary purpose for which mutual funds are acquired and held is for their expected good performance. Mutual funds are said to have professional managements which presumably provide the potential for investment results better than those that the layman might achieve by selecting his own individual securities and subsequently managing his portfolio himself. Mutual funds however are saddled with two burdens which offset some all or more than the performance benefits derived from the professionalism of their managements. The lesser of these two burdens is routinely measured in a mutual fund s expense ratio which includes its management fees administration and operational expenses and 12b-1 marketing fees. Market Impact Costs Still greater burdens imposed upon mutual funds are what are known as market impact costs. These are concessions in price to which all institutional investors are subject when they buy or sell securities by virtue of the large sizes of the positions they must trade. In addition to being functions of the sizes of their positions the magnitudes of such concessions also vary with the liquidity of the securities traded which in turn is related to the market capitalizations of such securities. The market impact cost of a mutual fund transaction may vary anywhere from 1 2 of 1 to 20 of the value of the security traded. The relative burden of market impact costs on a mutual fund s entire portfolio can be estimated given the total size of its portfolio the number of issues in its portfolio the median market capitalization of the securities in which the fund specializes and the rate of the fund s portfolio turnover buying and selling . Portfolio turnover If one examines the portfolio practices of mutual funds one is apt to be astounded by the high rates of turnover .