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Example Product Portfolio Gap Analysis Template
1
McFarland, Sheldon and Cherry Phan. “Structure Determines Performance, but Costs Matter Too!” LWI Financial Inc. (2011).
Estimated Average Mutual Fund Costs = weighted average of individual fund net expense ratios + (turnover x 0.36%)/100.
Portfolio Gap Analysis
Cost Analysis
Potential Gap
Trading Costs
While the expense ratio is a significant indicator in the managed investment cost analysis, it only tells
part of the story. There are also costs associated with trading securities not accounted for by the
expense ratio. These costs can make a fund even more expensive, and may potentially erode portfolio
returns.
A fund’s turnover ratio measures the amount of times a fund buys and sells securities it holds in its
portfolio. A turnover ratio of 100% indicates that a fund sold all of the securities held in its portfolio
and bought different securities over the course of a year. These buy and sell transactions result in
increased fund operating expenses that are not disclosed in a funds expense ratio.
Trading costs are not easy to quantify and thus, often go unreported. Independent research by Loring
Ward
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found that fund turnover costs on average 0.36% for every 100% of turnover within the fund.
This means a fund that sold all of the securities within its portfolio and replaced them with new
securities would have 0.36% lower return than an identical fund that didn’t trade any of its securities
during the year.
Costs
0
0.86
Recommended
Current
The chart above compares the estimated cost of owning the mutual funds in your current and
recommended portfolios. The cost includes the published mutual fund expense ratio and Loring
Ward’s estimated cost of mutual fund turnover, but does not include all fees and expenses that may
be included by actual ownership of a mutual fund.
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