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Be Alert for Mutual Funds Charging High Fund Expenses
recent study by John P. Freeman and Stewart L. Brown (a law school professor and a business school professor) examines the high fees that mutual funds charge their retail customers. In Mutual Fund Advisory Fees: The Cost of Conflicts of Interest, professors Freeman and Brown claim that the advisory fees charged to retail customers are substantially higher - double on average and in some cases triple or quadruple - the advisory fees that mutual funds charge public employee pension funds for the same services. The industry disputes the findings, and surely the debate will continue for some time.
Meanwhile, retail investors should pay attention to their total expenses that they are paying on their mutual fund investments. Total expenses include those advisory fees of which Freeman and Brown complain as well as marketing costs and administrative costs that funds charge investors. Total expenses exclude any sales charges, upfront or deferred.
We utilized Morningstar's Principia Pro to conduct our own study of mutual funds charging above-average expenses (greater or equal to 3%). We also wanted to know which of those funds are performing below average or worse. To be fair, we removed mutual funds with the prospectus objectives of world stock, foreign stock, Europe stock, Pacific stock and diversified emerging markets, owing to the fact that added research expense is required to run such mutual funds. We also removed funds that have minimal assets under management, owing to the fact that with very small funds, expenses consume a greater percentage of assets managed. Data is current as of 6/30/01.
Our study reveals the following nine high expense, poor performance mutual funds:
- AIM Large Cap Opportunity B;
- AIM Large Cap Opportunity C;
- Investors Capital Twenty A;
- Midas;
- Midas Special Equities;
- Pacific Advisors Small Cap A;
- Phoenix-Euclid Market Neutral B;
- Target Large Cap Value B; and
- Target Small Cap Growth B.
The findings are interesting. For example, both of the AIM funds invest in large growth type stocks. This implies that the funds should have less research-related expense than a fund investing in small cap type stocks. Moreover, the AIM B fund, with $196 million in assets, imposes a 5% deferred sales charge, whereas the AIM C fund, with only $80 million in assets, imposes only a 1% deferred sales charge. The difference in the deferred loads simply is inexplicable.
Likewise, Pacific Advisors Small Cap A topped the list in terms of the largest expenses charged. Although this small fund ($8.9 million in assets managed) invests in small cap type stocks (requiring more research than large cap type stocks), investors should note that the fund charges a front-end sales charge in the amount of 5.75% (on the high side itself), as well as a hefty 3.92% for expenses.
In markets that are not showing stellar performance, investors especially must pay attention to the expenses that they pay their mutual funds. These nine mutual funds may rebound in terms of performance, which may justify their high costs. In the meantime, these funds are too costly.
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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He can be reached at 312-641-2929.
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
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