Some funds tie fees to performance
April 4, 2007
NEW YORK — Mutual fund investors looking for money-back guarantees on Wall Street have often been told to keep walking.
Often, investors could simply grumble or try to shrug off the vagaries of investing but ultimately demand little of mutual fund managers. Now, a small but growing number of mutual fund families is using fees as a way to compensate shareholders for lackluster performance and even reward fund managers for strong returns.
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Fees at eight of Dunham & Associates' 11 funds are tied to performance. So, for example, fees at a fixed-income fund with an expense ratio of 0.3 percent might rise to 0.60 percent if the fund outperformed its benchmark by a substantial amount. On the other hand, if it underperformed by a significant amount, the fund would waive the fees.
"When the investors are experiencing euphoria, they don't mind and in fact welcome the opportunity to reward their advisers. When the investors are feeling pain and abused ... they're annoyed about paying fees for sub-par results," said Jeffrey Dunham, principal at Dunham, whose funds' combined assets are worth about $400 million. "It creates a partnership where one does not exist today."
He concedes what while investors might not save money overall with performance-based fees, they will feel relieved to pay lower fees should returns falter.
"It isn't about the absolute price. It's about price relative to value."
Not all funds that aim to assuage customer concerns over lackluster performance regularly reduce fees. Charles Schwab & Co. last month expanded the number of its funds that refund the previous quarter's management fee to dissatisfied investors. Sixteen of the company's funds now operate under this model.
"We think it's a fair proposition for the clients and we are targeting clients who may not be used to investing in managed portfolios," said Gregory Maged, vice president for advised solutions at Schwab Investors Services.
Schwab will consider adding the "money-back" guarantee to other funds as it determines how well it works with the first batch of funds. Maged said the company isn't worried shareholders will abuse the offer because the company would work with them to mollify their concerns, perhaps placing them in another fund. To date, only one customer has requested a refund, Maged said.
While Fidelity Investments has since the 1970s adjusted fees on some domestic and international equities funds based on performance, the company's board in February authorized the adoption of such fee structures for 19 additional funds. If approved by the shareholders of those funds, it would give Fidelity 68 funds with performance-based fees.
"We have found it make sense for shareholders because it more closely aligns our economic interests with theirs," Fidelity spokesman Vincent Loporchio said.
Fidelity evaluates performance against a benchmark over a rolling 36-month period in order to focus on long-term performance. The maximum adjustment to the fees is plus or minus 0.20 percent.
Laura Lutton, mutual fund analyst at investment research provider Morningstar Inc., hopes more funds will begin adjusting fees to mirror performance.
"We're big fans of performance fees because the shareholders get a break when the fund isn't delivering on performance. We view performance fees as a best-practice in the industry."
"This is a way fund boards can really score a goal for investors."
