Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
4 Funds With Rising Fees
09/15/2011 11:30 am EST
Nothing cuts into your mutual-fund performance more consistently than management and brokerage fees, and this is especially true in the current environment, writes Rob Wherry of Morningstar FundInvestor.
A cardinal rule of investing is that fees matter. The more a firm charges for its services, the less flows into shareholders’ accounts.
Fees are also a decent predictor of future results. So, funds that levy big expenses are at a disadvantage versus cheaper peers.
Most investors are familiar with the annual expense ratio. But managers can also rack up trading costs when they buy or sell stocks. Fund companies reveal these brokerage commissions, but investors have to dig through a Statement of Additional Information to find the numbers.
It’s worth the search: These trading costs can give investors a clearer perspective on how costly it can be to implement a strategy.
In fact, brokerage commissions are only one part of trading costs. Funds also suffer from trading impact (that is, when they trade a stock and those trades move the stock price so that their average price goes up when they buy and down when they sell).
Brokerage costs are also a decent indicator of which funds are taking significant hits on their trade impact. One way to sniff out funds with big brokerage commissions is to look at turnover.
Fund managers who churn through their positions will ultimately incur a trading cost. Bigger firms are able to use their size as leverage to argue for smaller commissions. But no fund is able to escape them completely.
We looked for equity funds in the Morningstar 500 that had turnover rates above 100%. We then looked through SEC filings for the actual dollar value of the trading commissions and compared them with an average net asset figure.
As you can see, we used 2010 numbers, because fund companies typically only publish these figures once a year. Given the volatility of this year’s stock market, it is fair to estimate that commissions are comparable in 2011, if not more.
The managers behind Brandywine (BRWIX) and Brandywine Blue (BLUEX) search for firms they think will beat Wall Street’s near-term earnings estimates. Over the past decade, that strategy has consistently produced a turnover rate higher than 200%.
In 2010, Brandywine and Brandywine Blue racked up commissions of $11.2 million and $10.4 million, respectively, or 0.59% and 0.48% of their average net assets. That’s up from 0.47% and 0.33% in 2007.
The differences can be attributed to a recent spat of poor performance that has led to asset outflows. As the funds have gotten smaller, the trading costs have eaten up a higher percentage of assets.
A similar situation is playing out at CGM Focus (CGMFX). Manager Ken Heebner is one of the true gunslingers in the fund world. Only once in the past 11 years has he failed to generate a 200%-plus turnover rate.
His rapid-fire trading has produced big numbers, namely an 80% jump in 2007. But coming out of the 2008 downturn, this fund has hit a few headwinds, leading to a category-rankings slump.
Heebner has racked up considerable commissions here, including a whopping $71 million in 2008. The fund’s $24 million tally last year was 0.79% of average assets. That’s up from 0.53% in 2007.
Finally, Fidelity International Capital Appreciation’s (FIVFX) turnover rate has ballooned the past three years under new manager Sammy Simnegar.
There’s no buy-and-hold strategy here. He says the typical holding period for a majority of the fund is around a year, with the rest of the positions being rapidly bought and sold.
Since Simnegar has taken over, the fund has racked up about $15 million in commissions. Trading accounted for 1.29% of assets in 2010.
But trading commissions aren’t the only common thread here. None of these funds commands a recommendation, a testament to the difficulties in pulling off a strategy that can run up costs.
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