BOSTON Dec 8 Fidelity Investments' $105 billion
Contrafund is having a bad three-year run, but you
would never know it by looking at its fees.
The mutual fund's management fees have increased 25 percent
to $614 million over the past three years despite investors
pulling several billion dollars as its performance lagged the
benchmark S&P 500 Index.
The escalation in fees at Contrafund is replicated in other
large actively-managed funds run by Dodge & Cox, DoubleLine, TCW
Group and T. Rowe Price, and belies a growing narrative in the
U.S. mutual fund industry that such firms are under siege as
investors redirect tens of billions of dollars each month into
cheaper passive investments.
While the seismic shift of money into funds that track
indices is real and unabated there is still a very good living
to be made in a bull market by large funds that select stocks
and bonds. See how management fees have surged over the past
three years at some popular mutual funds: [tmsnrt.rs/2h7Ic3U
Rising stock and bonds prices have helped assets increase 13
percent over the past three years, helping to counter investor
withdrawals at some popular funds. That has been a boon as fees
are calculated as a percentage of fund assets.
Larger funds also benefit from a roster of pension fund
clients and corporate retirement account investors, who are more
willing to sit through a patch of underperformance than more
fleet-footed retail investors.
Fidelity's Contrafund, run by star manager Will Danoff, is a
The benchmark S&P 500 Index's year-to-date total return of
11.95 percent is nearly three times better than Contrafund's
4.44 percent. And the fund's annualized three-year return of
7.72 percent also has been a big miss against the benchmark's
9.78 percent, according to Morningstar Inc data.
Contrafund has lost $6.1 billion in net withdrawals this
year, part of a wider $89 billion stampede out of large-cap
growth funds, according to Morningstar.
But Contrafund, at mid-year, was on track to possibly equal
or surpass 2015's fee performance, Fidelity disclosures show.
The fund is the beneficiary of a stellar long-term track record.
Its clients include some of the largest U.S. pension plans and
corporate retirement accounts, including an Apple Inc
employee retirement plan that holds about $500 million worth of
Investors in retirement plans typically do not move their
money around as much as assets in retail brokerage accounts,
said Todd Rosenbluth, director of research at CFRA, a New
York-based fund research firm.
Contrafund has a loyal following in the Wisconsin Deferred
Compensation Program, said Shelly Schueller, director of the
plan. About 50 percent of the plan's 58,000 participants have
nearly $600 million invested in Contrafund, whose 10-year
annualized total return of 7.94 percent beats the S&P 500's 7.04
percent return during that period.
"Participants tend to put their money in and they don't tend
to do a lot of rebalancing, said Schueller, who serves as
administrator of the plan. "They've had a pretty positive
experience with Contrafund."
Not all pension and corporate retirement plans have been so
Earlier this year, New Jersey's $3 billion-plus deferred
compensation plan said it dropped Contrafund as its large-cap
growth fund investment option. Officials cited the fund's
underperformance over three and five-year horizons.
Tacoma, Washington dropped Contrafund for a lower-cost
rival, cutting expenses for participants in the retirement plan
by nearly 50 percent, the city disclosed.
FUNDS CUT FEES AMID BULL RUN
Aware that they can't rely on rising markets forever and
faced with rising competition from cheaper passive investing,
actively-managed mutual funds have been cutting their fees.
Fidelity said its funds have expenses below industry
averages, 0.58 percent compared to 0.61 percent. And the company
has reduced fees even more for some big institutional investors
by shifting their assets into collective investment trusts,
which offer identical portfolios but lower costs because of less
The Ohio Deferred Compensation Plan last month, for example,
said about $1.1 billion in Contrafund assets will be moved into
a Contrafund collective investment trust account. The expense
ratio will be 0.43 percent, compared to Contrafund's average of
0.71 percent in a mutual fund setting.
Overall, however, the cuts have not been that deep.
The industry's asset-weighted average expense ratio, which
better shows actual costs borne by investors than a straight
average skewed by small funds with high fees, has dropped only 6
percent over the past five years to 77 basis points, if Vanguard
is excluded from the calculation, said Patricia Oey, a senior
analyst at Morningstar.
Vanguard, the dominant player in passive investing, skews
the fee picture because such a lopsided amount of money has gone
into its funds.
To be sure, not all actively managed funds are doing well,
particularly smaller asset managers with underperforming funds.
Industry pressures are causing some of them to seek partners
through mergers and acquisitions, according to analysts at
Moody's Investors Service.
Janus Capital Group Inc agreed in October to sell itself to
U.K.-based Henderson Group Plc for about $2.6 billion. The deal
gives more scale to Janus as it will be part of a London-based
money manager with about $320 billion in assets. Janus has
struggled as investors have pulled money from its funds.
An extended bout of bad performance at a mutual fund held by
skittish retail investors can wreak havoc on its asset base and
Net assets at the Templeton Global Bond Fund, for
example, have also dropped to $42 billion from more than $70
billion since the end of 2013. The fund's management fees during
the fiscal year that ended Aug. 31 fell 27 percent to $230.1
million, fund disclosures show.
The fund, known for its big, contrarian bets by portfolio
manager Michael Hasenstab on emerging market debt, has produced
a three-year annualized total return of 0.52 percent, compared
to a 3.02 percent total return on the Bloomberg Barclays US
Aggregate Bond Index.
Shares of Franklin Resources Inc, parent company of
the fund, are up nearly 6 percent over the past 12 months,
trailing the 9 percent advance on the S&P 500 Index.
The company declined to comment for this story. Executives
at the company have told analysts that big fee cuts will not
necessarily solve the outflow of money from Franklin Templeton
funds. The funds have to improve performance.
"It's always been about performance," Mac Sykes, an analyst
at Gabelli & Company, said when talking about industrywide
trends. "How you help your client is No. 1."
(Reporting By Tim McLaughlin; Editing by Nick Zieminski)