Large trades costly to fund performance

On average, every dollar that funds spend on trading costs translates into a roughly 42-cent reduction in fund value, Virginia Tech Professor Gregory Kadlec said today. at the Morningstar Investment Conference 2007 in Chicago. “So in other words, on average funds recover half their trading costs, but the other half is a deadweight drag on fund performance,” said Mr. Kadlec, who along with two others authored a paper called Scale Effects in Mutual Fund Performance: The Role of Trading Costs. The impact of trading on fund performance hinges on who is trading and why the trades are being done, he said. Large trades, flow-induced trades and soft-dollar linked trades are particularly costly to performance, the professor said. “By contrast, when funds trade in small quantities for discretionary purposes, the relationship between performance and trading costs is actually positive,” said Mr. Kadlec, who authored the study along with Richard Evans and Roger Edelen. Morningstar hopes to roll out a trading cost estimate for funds to make it easier for people to evaluate fund trading costs, Russel Kinnel, director of mutual fund research at Chicago-based Morningstar, said.