Kevin Crawford: “The Cost Calculator is a great idea, but flawed. I found this out by typing in BARAX (Baron Asset Fund) and looking at your results. It said that other funds would do me better in the long run assuming all of the funds had the same return. The cost calculator does not seem to take into account that great fund management can make a big difference in the long run. And Ron Baron has certainly done that over the long haul (just not 1998, which for him was a complete disaster; but this year he is back on track). I would love to hear your thoughts on this and I need a really romantic resturant for NYC which I’m bringing my wife to in October.”

Well, if you don’t mind its not being famous or wildly extravagant, try La Boite en Bois at 75 West 68th Street (212-874-2705). Cozy, authentic French without being snooty, and $100 should take care of the whole deal including the wine, tax and tip. I have no connection to it other than having eaten there.

As to Ron Baron, the point of the Mutual Funds Cost Calculator is not that you should always ditch a high-cost fund for a low-cost fund (although generally that does make sense, especially where the cost difference is large and no taxes are incurred by doing so).

But here’s what we do believe, and what study after study shows: Over time, costs matter. A great deal. Over time, most high-cost funds do worse than most low-cost funds. It’s easy to spot great fund managers looking backward. But how do you spot a Ron Baron before he’s got his track record? (A track record I’ll get back to in a moment, by the way.) And once he does have the record — will it persist?

The longer the track record, the more confident you may feel in the fund manager’s exceptional ability. But look at the flip side of that. The longer the track record, the more of it is already behind the manager. You’ve missed all that. And then you have to wonder, hmmm . . . might this person, now that you’re finally satisfied of his or her skill and ready to invest — might this person have gotten a little fat and happy? Or cocky? Or might the “paradigm” have shifted? (Not that I have any better idea what a paradigm is than the next guy who pretends to.) Maybe this is a fund manager who was great in the old world, but now won’t be able to out-think younger tech-whiz managers?

For example, no one would dispute that John Neff was a great fund manager. He had the added benefit, running the Windsor Fund, of Vanguard’s very low costs. But in the last few years of his management, having convinced even the most skeptical of his talent, his fund’s legendary performance actually became a little less legendary.

As for BARAX, Morningstar shows its 10-year annualized total return at 13.91%. That compares with 17.28% for the S&P 500. I’m first to admit this has been a great 10 years for the S&P (and that BARAX was designed specifically to find smaller growth stocks). Still, $100,000 invested 10 years ago would have appreciated $267,500 in BARAX, versus about $390,000 in the S&P. So all that great stock-picking — and what some people regard as the extra risk of smaller-cap stocks — weren’t enough to beat the boring old cost-free “market” that the S&P more or less, sort of, represents. You would indeed, in this example, have left $122,500 on the table.

Even with a well known, super-bright, respected fund manager like Ron Baron I’m not sure that it’s wise to ignore costs. There’s no denying costs weigh down performance. And they’re one of the few parts of the investing equation you can more or less control.

And that’s the point of the Mutual Funds Cost Calculator. Bon appetit.

Monday: How to Specify WHICH Shares of a Stock or Fund You’re Selling

 

 

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