Many people have noble goals when they start a business, and we are no different.  In creating our firm, my wife Tina and I aim to help individuals and institutions manage their money, through mutual funds or separately managed accounts, and to do so in a beneficent way.

 

Tina and I have been very fortunate.  We are not doing this to enrich ourselves.  We aren’t perfect, but we try to live our lives in a way that makes doing the right thing the priority.  We are all for capitalism and believe that it has done more to lift living standards around the world than anything else.  But one thing we have always admired is when a person or company charges less than it can, not because it wants to gain market share but because it believes it is the right thing to do.

 

In our experience, we have come to observe that the financial services industry is built on ignorance.  Like a handful of other industries, the potential for being taken advantage of is high because of the knowledge gap between the purveyors and the consumers.  Not only do consumers not know what an appropriate fee is, oftentimes they don’t even know what the fee is that they’re being charged, as it is often hidden.  In addition, there are various costs that are pushed onto unknowing consumers.  All these costs detract from an investor’s long-term return.  Here is information about Oelschlager Investment’s fees and other costs:

 

We do not charge a load and never will.

Many mutual funds charge a “load” when an investor transacts in the fund.  The load can be as much as 5.75% and can be applied at the time of purchase or time of sale or both.  So if a person invests $5,000, and the load is 4.5%, he/she immediately loses $225.

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We cap our fund’s expense ratio and do so at a low rate.

The annual amount an investor “pays” for holding shares of a mutual fund is the fund’s expense ratio, a number that is readily available.  The investor doesn’t explicitly pay this; it comes out of the fund, which reduces the value of the shares.  When a fund is new/small, the fixed costs of running it (essentially the back office recordkeeping, auditing fees, and fees to the advisor i.e. us) are high relative to the size of the fund.  As a result, it is common for investment firms to cap their mutual fund’s expense ratio so that an investor is not charged an excessive rate.  A firm does this by pledging to pay for any expenses above the cap or by waiving advisory fees that were due to come out of the fund.  Oelschlager Investments is not only capping the expense ratio for our Towpath Focus Fund but we are doing so at a lower rate (1.10%) than is customary.  In fact, this expense ratio is relatively low in comparison with many funds that have reached a much larger size. 

 

IMPORTANT INFORMATION:  Towpath Focus Fund (TOWFX): Gross Expense Ratio is 1.12%/Net Expense Ratio is 1.12%.  Towpath Technology Fund (TOWTX): Gross Expense Ratio is 2.48%/Net Expense Ratio is 1.12%.  The Fund's Adviser (Oelschlager Investments, LLC) has contractually agreed to reduce its fees and to reimburse expenses, at least through 03/31/2024, to ensure that total annual Fund operating expenses after fee waiver and reimbursement will not exceed 1.10% of the Fund’s average daily net assets. These fee waivers and expense reimbursements are subject to possible recoupment from the Fund within three years of the date on which the waiver or reimbursement occurs, if such recoupment can be achieved within the lesser of the foregoing expense limits or the expense limits in place at the time of recoupment. This agreement may be terminated only by the Fund's Board of Trustees, on 60 days written notice to the Fund's Adviser.

 

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The advisory fee for our fund is lower than that for many actively managed funds.

If a large fund has a high expense ratio it generally means that the advisory fee is high.  For an actively managed mutual fund (as opposed to an index fund), the largest component of the fund’s expense ratio (remember: this is what you effectively “pay”) is the advisory fee, or the fee the manager (investment firm) earns.  For Towpath Focus Fund, the advisory fee is 0.70%.  Could we get away with charging something higher?  Sure.  Would demand for our fund decline much if we charged 0.80% instead?  Highly unlikely.  The difference between charging 0.70% and 0.80% may not sound like much, as it’s only one tenth of one percent, but it means that our revenue is 12.5% lower than it otherwise would be.  It also means that the returns for our shareholders will be higher.  We like this.

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Our mutual fund does not have its own board of directors.

Our fund is part of a series trust that includes funds at other firms.  The trust has a small board of directors.  By being part of this series trust, our fund’s board expenses are a small fraction of what they are for mutual funds that have their own (well compensated) board of directors – directors that are hand-picked by the advisor, whom they are supposed to be overseeing.  These costs directly impact the value of an investor’s shares.

 

We do not use soft dollars to pay for research.

Portfolio managers use various services to perform their job, from company reports provided by brokerage firms to Bloomberg terminals that provide a wealth of financial data.  A common practice in the investment business is to pay for these services through trading commissions via “soft dollars.”  Here is an example of how it works.  A mutual fund buys 5,000 shares of a stock at $25 per share and pays four cents per share to the trading firm that executes the trade.  Most of this four cents (say 75%, or $150 in this example) goes into a soft-dollar “bucket.”  Over time this bucket fills up and is drawn upon to pay for services that the manager uses to help make investment decisions.  If the trade had been executed without funding this bucket, it may have cost the fund only one cent per share, or 75% less.  This extra expense is borne by shareholders of the fund.  This can be employed for separately managed accounts as well, and to be clear, this is legal.  Firms that use soft dollars are essentially shifting the expense of research services onto their clients/shareholders.  Oelschlager Investments pays for all its research services out of its own pocket.

 

We don’t have 12b-1 fees.

Some firms pass on marketing expenses for their mutual funds, or 12b-1 fees, to the fund itself, hurting shareholders.  We do not do this.

 

We pay IRA account maintenance fees on behalf of our clients.

IRAs have an annual maintenance fee that is commonly charged to clients.  Oelschlager Investments has decided to pay this fee for clients.

 

As we mentioned earlier, this is an industry built on ignorance.  Many people don’t understand enough about the business to know whether they are being taken advantage of.  They don’t have any idea how to evaluate whether they are receiving sound advice or appropriate value for the money they are paying.  Oftentimes they use an advisor or investment manager simply through inertia, not knowing the value they are receiving or the alternatives.

 

This industry is highly unusual in that the vast majority of customers would be better off essentially not trying to do better than average.  Over the long run, index funds post returns that have shown to be higher than those of the vast majority of managers.  It may sound strange to hear an active manager promoting the virtues of a passive strategy – imagine a company that sells only wooden decks advocating for paved patios – but we believe in being honest and transparent, even if it isn’t convenient for us.  If, over a long period of time, we don’t earn returns for you that are better than you could have achieved with an index fund, we don’t deserve to manage your money.  Does your manager say that?

 

We will never view a client as a revenue stream to be protected at all costs.  Be careful of firms that are good at selling hope - ones that are skilled at attracting clients and keeping them by telling people what they want to hear, even if it isn’t true.  Customers may ignore the evidence that it is time to move on because they WANT to believe what they are being told.  It’s much easier, for a variety of reasons, to stick with the status quo, so usually they do, often to the detriment of their portfolio’s returns.

 

Whether you are a current or potential client, we would be happy to talk to you.

 

Mark Oelschlager, CFA

President and Chief Investment Officer