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April 16, 2008

Worldwide Mutual Fund Assets
by Richard Shaw

The Investment Company Institute reported $26 trillion worldwide mutual fund assets from 26 reporting countries for the year 2007.

They reported assets for 2002 - 2007 which shows a 5-year average increase in total assets of 18.3% (net new money + performance), and a 2007 asset increase of 23%.

It is interesting to see how investors worldwide in the aggregate have committed their money, and which parts of the world have placed the most money into mutual funds.

There are about 66,000 mutual funds in total. That is probably substantially more funds than there are investable stocks.

The Americas (including all of North and South America) hold just over 1/2 of worldwide mutual fund assets. The Africa/Asia component will likely increase as a percentage as their populations become more affluent.

The allocation of assets by fund type differ significantly between US investors and non-US investors. US investors make a somewhat larger allocation to equities than the rest of the world.

It is interesting to observe that the effective asset allocation of US investors is 57% stock and 43% bonds and money markets (estimating a 50/50 mix of stocks and bonds in the "Balanced/Mixed" funds category). That is quite similar to the classical 60/40 stock bond allocation, such as available through the Vanguard Balanced Fund (VBINX, expense ratio 0.19% for small accounts and 0.10% for amounts over $100,000).

When you consider how US investors have experienced the "friction" that Warren Buffet has defined, US investors have given up a lot to get somewhere they could have gotten more cost effectively. That friction costs investors $12 billion for each 1/10th of 1% in asset management expenses, and does not include fund sales loads, trade execution costs or income taxes due to active trading.

On the other hand, a fund such as VBINX has no sales loads, bare bones management fees, and a tax efficient passive index approach.

Overall, US investors have given more to fund management companies, Wall Street brokerages, fund sales agents and the Internal Revenue Service than they needed to do.

That same balanced approach is also easily achievable through ETFs by combining a broad US stock market ETF and an aggregate bond market ETF -- with favorable entry costs (perhaps $10 - $25), favorable costs of staying in (perhaps 0.09% to 0.20% annual expenses), and low tax drag due to use of passive index funds that have minimal trading except for rebalancing.

Examples of broad US stock market ETFs available from the three largest ETF sponsors are:

• VTI (0.07% expense, from Vanguard)
• IWV (0.20% expense, from Barclays)
• IYY (0.20% expense, from Barclays)
• TMW (0.20% expense, from State Street)

Examples of aggregate US bond market ETFs from the same sponsors are:

• BND (0.11% expense, from Vanguard)
• LAG (0.13% expense, from State Street)
• AGG (0.20% expense, from Barclays)

We are not suggesting that a balanced fund approach is right for everybody, or that skill cannot out perform the market -- but we are saying that in the aggregate US investors left a lot of money on the table for managers and distributors by effectively creating a $12 trillion balanced mutual fund simulation.

Lesson -- if you buy funds of any type (mutual funds, ETFs or other), make sure that you are not working hard and expensively to recreate an overall broad index. Either tilt away from overall market composition with reason and conviction, or buy an overall market index with one or two funds.

In any case, seek a low cost of entry, a low cost of staying in, and a low cost of exit, with no more tax penalty than is essential to accomplish your exposure objectives and risk management.

Richard Shaw
QVM Group LLC

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