If it hasn’t been clear in my past postings, I’m a huge fan of [tag]index funds[/tag]. The vast majority of our [tag]retirement[/tag] [tag]savings[/tag] are held in a variety of index funds. I’m generally of the view that the individual investor has almost no chance, at least consistently enough to make the risk worth it, of beating the market. And that belief extends to mutual fund [tag]managers[/tag] as as much as it does to Joe Public.
One of my big beefs with actively managed funds are the generally high [tag]management[/tag] costs associated with them. For instance, the management fee for an index fund like the Vanguard Total Stock Market Index ([tag]VTSMX[/tag]) is 0.19%. It’s category average? 1.19%.
OK, yes, I hear you. I know, I know, just a 1% difference. But, as I just said, I don’t believe the individual has much of a chance consistently beating the market (which a proper index fund should be attempting to passively mirror). So I’d just be paying an extra percent on something I believe is destined to fail over the long term anyway. Doesn’t seem a smart move!
But here’s an idea for active mutual fund managers that I might be able to get behind: Beat the index, of don’t get paid!
Two [tag]money manager[/tag]s are trying out a new [tag]pay-for-performance[/tag] system: If they don’t perform, they won’t get paid.
I especially like the concept of dropping the fee to zero if the fund merely matches the index or underperforms it. Though it’d be especially appealing if, when they underperformed the index, they’d refund that back to you rather than just drop it to zero. [Hey, I can dream, can't I? 
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So does that mean I’m signing up for some TFS Small Cap [[tag]TFSSX[/tag]]? Nah. Like I said (and said again!), I don’t believe they can beat the index consistently. If I wanted to index the Russell 2000 (TFS Small Cap’s ‘index’), I’d just pick up a little iShares Russell 2000 Index [[tag]IWM[/tag]] or some similar index vehicle and be done with it.
But, I have to say, it tweaked this investor’s interest, so we’ll have to see if anybody else decides to follow suit and somehow makes the proposition a bit more tempting.
