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December 14, 1998

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Subject: Re: What am I supposed to do?
Author: TMFMax

[fbcx writes:]

Since inception your $10,000 in the Vanguard Growth Index Fund would have earned you $32,355. Pioneer Growth AFTER the $575 commission would have netted you only $31,681. Or, $674 less over 6 years. That assumes you believe my time spent interviewing and educating you and taking your phone calls to hold your hand and reassure you every time the market hiccoughs is worth nothing (and I know you do). But how many doctors can you get to hold your hand and listen to your problems. How many professionals can you get to work for you for $5.62 per month? If we assume I earned my $5.62 per month, then your hot-digidy-damn Growth index beat my fund by a whopping total of $99 over 10 years. What is outrageous is that Vanguard can give you aboslutely nothing but an extra $99 over 10 years and still have you believing their [stuff] doesn't stink. How naive can you be?...

I wasn't trying to sell it to anyone on the board then and I am cerainly not now (it is nevertheless a damn good, well run fund, even at the full load if anyone ever really pays those anyway, my clients certainly don't).


The Pioneer fund is not a "damn good well run" fund in my opinion and I'll tell you why, in the hopes that perhaps you'll be able to best help your clients by getting them an index fund instead.

If you're looking to get the proper returns from a large-cap growth fund, you have to compare that fund's returns against the appropriate index in my opinion.

With MOMGX, the 1-year, 3-year and 5-year returns are 20.6%, 30.7% and 23.4%. It's more appropriate though (to attempt to compare apples to apples) to compare the B-class shares, which still have a 1% CDSL, but let's not quibble, shall we. The returns there are 19.7% for 1 -year, 29.7% for 3-years, and it hasn't been open long enough for 5-years, but obviously it would have returned 22.4%.

The Vanguard Growth Index (VIGRX) has produced returns, over the same time, of 34.5% for 1- year, 31.2% over 3-year and 26.6% over 5-year. Pioneer substantially underperforms the appropriate index-- that's all I'm saying, and it's no surprise. It's not a surprise to me, it's not a surprise to you, it's not a surprise to any readers.

It might, however, be a surprise to some people whose brokers have put them into the fund, though I am not accusing you of failing to have disclosed it's relative underperformance to your clients.

Now, Pioneer underperforms the appropriate index by around 3 percent a year. That might be a little high -- let's just say it underperforms by 2% a year, which would be in line with the average mutual fund over time.

We all know that large cap growth funds have had a good run, but nothing lasts forever, and assuming that returns follow their historic runs, I think a ten percent market return is a logical expectation. Pioneer, because of its high expense ratio can be expected to continue to trail the appropriate market returns by 2%. So here's what happens, according to John Bogle of Vanguard:

What difference would an index fund make over 50 years? Well, let's postulate a +10% long-term annual return on stocks� If we assume that mutual funds costs continue at their present level of about 2% a year, an average mutual fund would return 8%. This 2% spread is very close to that of the past 15 years, during which the Vanguard 500 Portfolio provided a 2.2% margin of return over the average equity fund (or, more accurately, the better performers that survived the period[.]�[E]xtending this compounding out in time on a $10,000 initial investment, the market (at 10%) would produce $1,170,000 after 50 years; the mutual fund (at 8%) would produce $470,000. The difference in return between the two -- $700,000 -- is an unbelievable 70 times the initial stake of $10,000.

"Looked at from a different perspective, our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remainder of $470,000. The financial system has consumed 60% of the return, the fund investor has achieved but 40% of his earnings potential. Yet it was the investor who provided 100% of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake? Merely to ask the question is to answer it: 'No.'

So, yes, a 5.75% load is outrageous, and the amounts that owners of this fund have to pay over time are very very steep, because Pioneer isn't providing anything, it's costing them. Pioneer Growth happens to be in a sector that has had a great run, but within that sector, it underperforms the relevant index.

I wish you and your clients the best. I hope that you will consider putting your clients into index funds, as I believe you would be serving them very well by doing so.



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