OEICX

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I just came across something absurd.

Take a look at this Fund from JP Morgan:

It’s an “Equity Index Fund.” Because it’s an index fund, there are certain qualities that you would attribute to this fund. Just based on the name.

Now, JP Morgan is a very well known company. I know many people would love to have JP Morgan on their resume. When it comes to financial products and services, I sure would look at a large, well-established company like JP Morgan as a trustworthy establishment.

The trusted name in Finance

As of right now, JP Morgan has a market cap of $435 billion. That’s the amount of value the world says JP Morgan is providing.

That’s why I was shocked to come across this fund.

Let’s check it out more.

OEICX

What is the fund designed to do?

Ok, awesome. I know the S&P 500. Seems like this would be a great fund for a long-term investment in the market. People keep saying I should invest in the market to save for retirement.

Wow! A group of people with a combined 78 years of industry experience managing this fund. That’s incredible. I can assure that my money is in good hands.

All right. Pretty good ratings from Morningstar. Morningstar is another well-known, renowned name in the financial industry, so their ratings give me confidence that this is a great S&P 500 fund. Well, it’s not a 5-Star fund – it is tracking the S&P 500 index after all, not exactly a high-growth fund. Still, a consistent 3 stars is pretty darn good.

I’ve never heard of Lipper before, and I’m not sure what these mean. Is “Rank 103/115” good? Or is that one of the worst? Well, the higher the percentage, the better it is, usually. I can’t imagine two 23-year financial industry pros are managing a fund that’s not amazing.

So, everything looks pretty good. Plus, the guy who came by to tell me about this fund was, oh my, he was just such a great guy. So friendly. I think I’ll invest my money into this fund.

What could go wrong?

It’s a lemon

A lemon? How could that be?

The reviews, experts, and ratings would make anyone feel good about this fund. Besides, $5.28 billion is currently invested in this fund.

I don’t know the full story behind this fund, but to me, I would imagine that the people who own the $5.28 billion in this fund would not have chosen to place their money in it if they knew what you’re about to learn.

You know, I was thinking that the fund managers and salespeople for this fund may just be ignorant and have blind belief that JP Morgan is out to do what’s best for their clients, but after writing it out, it didn’t make any sense. Do they knowingly withhold information and education that, if presented, would cause them to lose nearly $60 million in yearly revenue?

Would you withhold information to keep $60 million?

The fund is a copy of the S&P 500

Ok, well we already knew that. The description said so very clearly. Let’s not spend too much time on this.

Take a quick look at the top ten holdings for each

OEICX Top Ten Holdings

S&P 500 Top Ten Holdings

Now take a look at the sector breakdown:

JP Morgan was nice enough to provide the stats for the index right there. Thanks!

Wow, the value for OEICX must be in the zero-point-something percentage differences there. What else do brains with 78 years of collective finance experience do all day?

It doesn’t even match the S&P 500

What? Since it’s literally an “S&P 500 Fund,” it would have to perform at least as well as the index itself, right?

Check it yourself:

You won’t find this chart in the sales brochure

Just so we know that the portfolio visualizer tool I’m using doesn’t have weird data, I checked the performance on JP Morgan’s page for the fund for the same time period:

How the heck does the JP Morgan fund perform so badly? How does it net you over $100,000 LESS than the index itself?

It’s the fee. It’s not hidden. It’s not tricky to find. It’s there in plain sight on the fund’s webpage.

Take the CAGR of the SP500 (7.53%), subtract the fee, you get pretty close to the CAGR of OEICX. (6.36%).

There’s no trickery here.

Frankly, it’s not exactly a lemon because 6.36% CAGR is still pretty good.

But my question is: who would put their money into this S&P 500 fund that severely lags the the S&P 500 when they can just invest in the S&P 500 itself?

The fund we used in the performance comparison (SPY) has an expense ratio of 0.09%, and that’s not even the least expensive one you can find.

What gives?

Why does OEICX exist?

Why have people invested $5.28 billion in it?

Why does JP Morgan exist?

What do you think?

Not just JP Morgan

Of course not. I just happened to pick on JP Morgan here because I came across their fund. Don’t you think that other big financial institutions, ones that we trust with our money, are doing the same thing?

Look, it’s not even difficult to see that OEICX severely underperforms. You have all the information you need to make that judgement on their own website. If we are falling for such an obvious scam, what else are we falling for that’s maybe not so obvious?

Better question: How are they able to get away with stuff like that?

I’ll offer two plausible reasons, but I really want you to think on this more.

(1)

OEICX is an S&P 500 fund offered through many workplace 401(k) plans. When an employee sets up his 401(k) at work and chooses which fund to put his money in, he gets surface-level information about the fund. He sees that it’s an “Equity Index Fund” that is “designed to track the price and dividend performance of the S&P 500.” He’s heard about the S&P 500 and decides that it’s the fund he wants.

It could be the only S&P 500 fund offered in his plan because 401(k) plans typically have a limited number of options. Without a second choice that looks similar, there is less reason for him to dig deeper to seek more information.

(2)

A client has hired a JP Morgan Financial Advisor to help manage her portfolio and choose the right investments. The advisor suggests that she have a large chunk of her portfolio in stocks, and that a great way to do that is through investing in the S&P 500. She’s presented a colorful JP Morgan brochure and agrees that OEICX, a fund “designed to track the price and dividend performance of the S&P 500,” is a good choice. Of course, she is given a fund prospectus, but hey, she hired a financial advisor so she wouldn’t have to spend time reading all that jargon. Besides, she trusts him.

Both of these scenarios happen all the time. Yet, at the end of the day, what do people know? Long-term investors in OEICX still made money, albeit much less that they could have made if the knew what to look for.

It takes about one minute – often less – to find the fee for any fund.

It takes less than ten minutes to compare the historical performance of any two funds.

Is eleven minutes of anyone’s time worth over $100,000?

Obviously.

But you have to know to do it.

Should people be mad?

I want to add here that JP Morgan clients who invest in OEICX may be very happy paying the extra fee because they get other benefits, like quarterly steak dinners, invitations to exclusive networking events, and a dedicated person to call that’s always on top of their money. It may be worth it. But I can’t imagine that you couldn’t purchase low-cost ETFs from other companies on their platform.

There’s nothing intrinsically bad going on here, because the client has always had all relevant information available to them. While the implication may be that with OEICX you’ll get S&P 500-similar returns, it’s not JP Morgan’s responsibility to do the client’s due diligence. They have quotas to fill.

But let me ask you this:

If everybody knew what you now know about OEICX, what would happen?

Would OEICX gain any new investors?

Would current investors in OEICX move their money to a lower-cost fund?

Given that people want their investments to perform as well as possible, the ideal theoretical logical end result of this information would be:

  1. The near immediate removal of all $5.28 billion of fund assets from OEICX.
  2. The fund managers would then be asked to appear onto MSNBC to explain why the fund collapsed in such a short amount of time.
  3. If they didn’t get suicided first, they would reveal to the world that OEICX is simply a copy of the S&P 500 that performs much worse because JP Morgan charges a hefty fee.
  4. JP Morgan would then have a heck of a time trying to retain their customers and rebuild trust in their name.
  5. Every other financial institution pulling the same shtick would be scrambling to cover their tracks before all of their customers start investing how much they’re paying in fees. But for most, it will not be possible because the information is too easy to find. Besides, you can’t legally hide the expense ratio from investors.

We could call it the Feegate scandal.

The landscape of the financial industry would change.

Is this going to happen?

You could share this post to everybody that you know, and ask them to share it to everyone that they know (while subscribing to RF of course), so on and so forth, and eventually all OEICX investors would know what we know.

What would they do?

Would they pull their money?

Reviewing the scenarios

Both of these scenarios assume that every single person, whether invested in OEICX or not, knows what you now know.

Would OEICX gain any new investors?

No.

If you disagree with me here, please explain why:

Would current investors in OEICX move their money to a lower cost fund?

You would think so. But most people would not.

Why’s that?

Let’s say that an investor invested $100,000 in OEICX way back in 1991 and left it there. his investment would have grown to $1.09 million. That’s nearly a $1 million gain.

Today, that investor reads this post realizes for the very first time that his money could have grown to $1.75 million had he invested in the 0.09%-fee fund. He’s angry, and wish he knew this information when he first invested.

His first thought tells him to pull out of OEICX completely and move his money to a lower-cost fund. But then he remembers Capital Gains Tax. His $1 million gain would be taxed by the IRS.

If he moves all of his money at once, he’d have a tax bill of $200,000 (20% of $1 million).

If he moves it over a couple years, he’d have a tax bill of $150,000 (15% of $1 million).

The amount that he loses to taxes would not be made up by the increased performance of the new investment in his lifetime.

So he chooses to leave his money in OEICX. It’s done well for him, and he was happy with it before he found out about the outrageous fee. No point in crying over spilt milk.

Any new money, however, will but put in another fund. That’s for damn sure.

THINK!

(1) It seems that the reason low-performance high-cost funds like OEICX have so much money invested in them is because at some point, an investor trusted someone or something enough to not do the most basic level of research.

(2) The someone or something advertising this is either blissfully ignorant or a half-truth teller. Could you sell OEICX?

(3) The tax code essentially controls your money through negative incentives, and offers no do-overs. Whether you invest in something that makes you $10 or $1 million or $1.65 million, you’re locked in. And when you realize a gain, the IRS demands payment.

It really begs the questions:

  • For whose benefit is the tax law written?
  • What does a lobbyist do?
  • Does JP Morgan employ lobbyists?
  • What does “lock-in” mean?
  • Can your money be held hostage?
  • When were capital gains (income) taxes introduced?
  • Why should you be penalized for moving your money from one fund to another (similar) fund?

What’s the solution?

You might be a bit angry at the system, and, after reading this, you may have less trust in big financial institutions like JP Morgan.

You might call for the industry to change, to be more transparent, more regulations, or even changing the tax code to remove the exclusion of stocks in the 1031 Exchange Rule.

But you’d be missing the point.

OEICX exists because of us.

JP Morgan is there because we allow it.

The choice has always been, and will always be, ours.

Awareness is Power.


Corona Crash Opportunity [Updated 24 March 2020]

One of the best times to make changes to your portfolio is when the market is down across the board. You can avoid paying capital gains tax altogether, and actually get tax benefits if you sell a holding at a loss.

Instead of feeling down when you see red numbers in your portfolio, view them as indicators that you can move money around without paying the tax man.

The IRS allows you to use capital losses to reduce your taxable income, up to a certain amount ($3,000 in 2020). Any excess losses can be carried over to the next year.

For example, if you realize $10,000 worth of losses this year by selling during this market pullback, you can deduct $3,000 from your taxable income this year, $3,000 in 2021, $3,000 in 2022, and the last $1,000 in 2023. If you’re in the 24% Federal tax bracket each year, you’ll pay $2,400 less in federal taxes over the next four years.

Just make sure that you haven’t bought and won’t buy the exact same stock within 30 days of when you sell. Doing so would break the IRS’s Wash Sale Rule and you won’t be able to get the tax benefit.

So if you’re an index ETF investor, you can get right back into the market by buying a different, but similar ETF.

If you have an OEICX in your portfolio, now may be a good time to switch it out.


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