Data & Research February 14, 2008

New Study Identifies Lowest-Cost 529 Plans

The least-expensive 529 plans available nationwide are offered by Ohio, Illinois, and North Carolina, according to Savingforcollege.com’s 529 Fee Comparison Study.
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The study, recently updated for 2008, examined direct-sold 529 college-savings plans from 49 states and the District of Columbia. The comparisons are based on the 10-year projected costs of a $10,000 investment, as reported by each 529 plan in its official program offering materials. The report also identifies those states where residents have even lower costs in the home-state 529 plan due to the waiver of annual account fees for state residents.

Due to their more complicated fee structures, the company explained, plans sold through financial advisers were not included in the study.

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Examination of Fees

“There’s been a huge effort on the part of the states and their outside vendors to bring down investor costs in 529 plans,’ remarked 529 “guru’ Joseph Hurley, founder of Savingforcollege.com, in a company release.

Savingforcollege.com showed the effect fees and expenses can have on a college-savings fund:

  • Plan A has underlying investments with an annual return of 7% and the plan manager charges a fee of 20 basis points. Therefore, an investment of $5,000 today will grow to be worth $16,340 in 18 years.
  • Plan B uses the same underlying investments, but charges a management fee of 40 basis points. In Plan B, that same $5,000 investment will grow to $15,798, or $542 (3.4%) less than Plan A.

However, despite the research about fees, they should not be the only consideration in selecting a particular 529 plan, the company said. “The more important figure is the net performance of your 529 account after all costs. I might pay more if I felt I could get better net returns without taking on more investment risk,’ stated Hurley. State tax and other benefits are also important factors.

The report can be accessed at www.savingforcollege.com/529_fee_study.

Savingforcollege.com is an independent research, consulting, and publishing company providing financial professionals and consumers with comprehensive and objective information about Section 529 plans, Coverdell education savings plans, and other college investing strategies. In December 2007, Savingforcollege.com was acquired by Bankrate, Inc., a personal finance Web site.

The Markets February 14, 2008

Morningstar Unveils Hedge Fund Ratings and Index

Morningstar on Thursday announced it had launched the Morningstar Rating for hedge funds as well as the Morningstar 1000 Hedge Fund Index and 17 indexes based on the Morningstar Hedge Fund Categories.
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According to a Morningstar news release, the new rating system for hedge funds uses a scale of one-to-five stars. Morningstar first categorizes the hedge funds into one of 17 Morningstar Categories, such as “convertible arbitrage” or “emerging market equity,” according to a series of quantitative and qualitative measures. Next, Morningstar ranks and rates the hedge funds against their peers in the Morningstar Categories based on risk-adjusted return, the announcement said.

The risk-adjusted return calculation and rating address two issues that are specific to hedge funds, Morningstar said. First, unlike many other risk-adjusted performance measures, the Morningstar hedge fund rating does not assume that funds have returns that follow the normal bell curve distribution.

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Second, the rating addresses the fact that some hedge funds invest in illiquid securities that are infrequently priced. Infrequent pricing gives hedge fund managers “flexibility” in how they value such positions when calculating returns they report to hedge fund databases. The result is a smoother or less volatile reported return series.

To correct for this the company said it applies a statistical procedure to the return series and then calculates the risk-adjusted return measure. This risk-adjusted return measure accounts for all variations in a fund’s monthly performance, with more emphasis on downward variations.

Morningstar’s database has approximately 7,700 direct hedge funds and funds of hedge funds. To qualify for a rating, direct hedge funds must have at least 38 months of consecutive performance data, the news release said.

Funds of hedge funds, of which there are 3,300 in Morningstar’s database, are not eligible to receive ratings. Morningstar expects that approximately 1,800 of the 4,400 direct hedge funds in its database will receive ratings.

Hedge Fund Index

Morningstar also launched the Morningstar 1000 Hedge Fund Index, a global, broadly representative benchmark for hedge fund performance, the company said.

The index is composed of the top 90% of eligible assets in Morningstar’s hedge fund database. For the purposes of the index, Morningstar counts funds with shared portfolios as a single hedge fund; funds of hedge funds are excluded from consideration.

The index is updated daily for the previous month-end, rebalanced monthly, and reconstituted semi-annually. In addition, Morningstar said it has launched 17 category indexes based on Morningstar’s strategy-specific classification system for hedge funds.

“We believe the Morningstar Rating for hedge funds is the best starting point for judging a fund’s past performance. We want to make researching hedge funds a more transparent process and our new ratings and indexes will allow qualified investors, advisers, and institutions to better evaluate and compare hedge funds to their peers,’ said John Rekenthaler, vice president of research, in the announcement.

More information is available at http://global.morningstar.com/hedgefundratings.

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