Question
Consider an actively managed fund, Fund A, that generates a 15% p.a. gross return and charges a 2% p.a. expense ratio. There is also a
Consider an actively managed fund, Fund A, that generates a 15% p.a. gross return and charges a 2% p.a. expense ratio. There is also a passively managed fund, Fund P, that generates only an 10% p.a. gross return but charges only a 0.15% p.a. expense ratio.
a) If Fund A charges no front-end load, back-end load, or 12b-1 fee, would an investor always make a higher net return in Fund A than in Fund P regardless of their investment horizon?
b) Consider an investor that has a 5-year investment horizon. Suppose that Fund A charges a front-end load. How large does the front-end load need to be so that the net return that an investor makes after 5 years by investing in Fund A is lower than if they were to invest in Fund P? (Note: You can answer this question using the Solver in Excel.)
c) How does your answer to Part 2 change if Fund A were to charge a 12b-1 fee of 1%?
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