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Actively managed funds thrive amid seismic shift into indexing
December 8, 2016 / 5:25 PM / in a year

Actively managed funds thrive amid seismic shift into indexing

BOSTON, Dec 8 (Reuters) - 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: [ ]

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 prime example.

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 Contrafund shares.

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 patient.

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.


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 regulatory oversight.

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 management fees.

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)

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