Want the Active Manager Without the Expense Ratio? Here’s How to Use Motif Investing to Copy Your Favorite Investor’s Portfolio


Investment fees – the bane of every individual investor. Everyone has seen the numbers on how even moderate expense ratios lead to investors losing out on tens of thousands of dollars over the course of their investments. Just yesterday we highlighted a quote from Meb Faber on how just average fees can ruin a successful investment strategy.


But these fees seem impossible to avoid for investors looking for any specific concentrations or active forms of management.


But for investors in a select number of ETFs and Mutual Funds, there is a simple way to reduce those fees to a level much closer to 0 – Here’s how:


The other day  I saw this article on MarketWatch with the title: “How to Actually Invest in Small Cap Quality Stocks”, I’m a sucker for headlines, so I clicked.


The article recommends a closed end fund – Source Capital (Ticker: SOR), which also has a very similar mutual fund FPA Perennial Fund (Ticker: FPPFX) as one of the best ways small investors can get exposure to high quality small cap stocks. And who could argue? The managers of the fund have an excellent track record:




But there is one thing I don’t like – a nearly 1% expense ratio (for the mutual fund – the closed end fund reports fees of 0.82%)


Now these managers can say they have justified their fee. Just look at the chart above. And they may be right. But I think if we look closer at the fund’s holdings, we can see that with a little help from Motif Investing, an investor could set up a very similar investment portfolio for an expense ratio of near 0!


How much could an average investor save if we could eliminate that expense ratio on FPPFX? We can use our Expense Ratio Calculator to find out:


If the fund’s average 10.72% return continues over the next 30 years, an investor who initially contributes $10,000, then adds $1,000 per year afterwards would lose over $80,000 in potential growth in fees! That’s insane!




So how do we go about cloning this fund’s portfolio? Start with the fund’s holdings:



Every mutual fund and ETF lists their holdings on their website, and in their most recent reports. Source Capital’s most recent annual report is here: http://www.sourcecapitalinc.com/docs/default-document-library/2014-12-source_annual.pdf?sfvrsn=2


And it clearly lists the fund’s holdings.




30 stocks make up over 96% of the fund’s holdings.

Managing a traditional brokerage account with 30 holdings and correctly weighting them would be a very time consuming (and possibly expensive!) task.

But Conveniently, Motif Investing lets investors put up to 30 stocks into one motif – all for $10. (That’s a one-time $10 charge, no annual expense ratio)

If you are not familiar with Motif Investing, or want more information – You can see our full review of Motif Investing here, be sure to use the link in the review, the bottom of this article, or the ad on right side of our website here for a $150 bonus to new investors.


So, set up your Motif, add each of the fund’s holdings:

motif building SOR


Note: Motif does not currently support international stocks. So some of the holdings cannot be purchased in this Motif. In the end – we can recreate about $600 million of the fund’s $675 million equity portfolio, or about 88% of the portfolio. A tradeoff I am happy to accept in order to eliminate the fund’s expense ratio.


After each holding is added – set the weighting of each holding so it matches with the fund’s holdings:



And there you have it, about 20 minutes of work to save you 1% on your investment each year.


If by chance you are interested, this Motif can be purchased here: https://trader.motifinvesting.com/motifs/source-capital-clone—begin-to-B2ckbrFO#/overview



Then, as the fund’s quarterly or semi-annual reports come out, you can adjust and rebalance your motif as necessary.


But the point of this article is not to sell you on Source Capital’s holdings. Rather it is to use this idea in a much broader way. Any ETF or Mutual fund can be recreated with Motif Investing.

Now, some with hundreds or thousands of holdings would not be worth the hassle, but some of the most successful fund managers are successful because they concentrate their holdings, much like this fund which has 96% of its assets in 30 stocks.


In fact, using the ETF screener on ETFdb.com http://etfdb.com/screener/ , we can see that there are BILLIONS of dollars invested in ETFs that have a small number of holdings:




Not all of these can be copied with Motif Investing because they contain mostly international stocks, or use derivatives, but there are several large, well known ETFs on the list that can be easily recreated with Motif Investing – and save investors a boat load (See below).



When does Using Motif Investing To Recreate a Fund Make Sense?


Of Course, using Motif Investing is not free either, so when does this strategy of recreating professional’s investment portfolios pay off over just buying their fund?


Motif charges $10 per “trade” (which can mean buying or rebalancing all 30 stocks within that motif). So rebalancing quarterly would cost $40 per year.


If you are investing $1,000, that $40 per year is equivalent to a 4% expense ratio, so in using source capital as an example, it may be better to just buy the closed end fund (The mutual fund FPPFX has a $1,500 minimum).


But, consider investing larger amounts:

  • $40 per year on a $10,000 investment represents a 0.4% expense ratio.
  • $40 per year on a $50,000 investment represents a 0.08% expense ratio.
  • $40 per year on a $100,000 investment represents a 0.04% expense ratio.


Now you are really starting to save money! You are now getting the portfolio of a very successful investment manager for the price of a vanguard index fund!


Think reducing these fees hardly matters over the long run? Let’s plug in our numbers for a $50,000 investment in FPPFX and assume the fund only returns 7% per year (It has returned 10.7%) for the next 30 years:



Is $81,000 worth 20 minutes of your time 4 days a year? I think so.


Want to see something even more mind boggling? Type in a 10.72% investment return (What the fund has returned over the past 15 years) in our Expense Ratio Calculator instead of the 7%….It’s nearly a quarter of a million dollars saved!




Want a professional investment portfolio for the lowest cost possible? Motif Investing makes it easy.

I have personally created Motifs to hold oil and gas companies to try to capitalize on the decline in oil stocks recently, and recreated a REIT index for the portion of my investments that would be allocated to REITS. Saving 40+ basis points of fees compared to investments in specific ETFs. Can you see why I am starting to love Motif Investing? It can save investors of any style thousands of dollars.


Are you invested in any high cost ETFs or Mutual Funds? Head over to Motif Investing and see if you can recreate your funds and kiss those expense ratios goodbye!

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