Tuesday, December 14, 2010
Calculating net-of-fee returns
Let's say you want to calculate net-of-fee for a GIPS presentation: should you accrue your quarterly fees monthly? If you only report annual returns, is it okay to deduct the annual fee from the annual gross? Or, should you deduct fees as they would be charged (e.g., quarterly)?
I ran a quick test (with an annual fee of 1%) to see what might happen and discovered some interesting results.
What I think is perhaps most important is that by only removing the fee annually, the net-of-fee return avoids the compounding. And while this is a handy and convenient way to accomplish deriving the net-of-fee return, it clearly overstates it, because of the absence of compounding.
In my opinion, if you charge your fees quarterly they should be deducted quarterly.
I will present additional examples in our newsletter which will show similar results.