Several mutual funds are lowering the limits on operating expenses paid by shareholders, effectively cutting their fees.
The changes appear to be related more to increases in fund assets – thanks to last year’s robust market returns and new cash inflows – rather than pressure from regulators. New York Attorney General Eliot Spitzer, in particular, has made it clear he wants to see lower fees charged to fund shareholders.
Spitzer’s office recently reached a settlement related to allegations of preferential market-timing arrangements with Alliance Cap Mgmt Holding L.P. (AC) under which Alliance agreed to reduce the fees it charges fund shareholders by 20% for at least the next five years.
At least four funds have said in recent Securities and Exchange Commission filings that they are lowering limitations on their operating expenses. As fund assets grow, costs associated with their administration — such as transfer agency, custodian and legal fees — usually shrink as a percentage of net assets, resulting in a lower expense ratio. Funds typically charge investors the maximum under the cap.
The $117 million Chase Growth Fund (CHASX) and the $120 million Al Frank Fund (VALUX) are among those lowering their fees. In its filing, Chase Growth said its investment adviser, Chase Investment Counsel Corp., agreed to lower the cap on the fund’s annual operating expenses to 1.39% of assets from 1.48%. A spokesman for the fund said its increase in assets last year has allowed it to take advantage of “economies of scale,” and the move had nothing to do with the attorney general’s call for lower fund fees.
The Al Frank Fund posted a 78% return last year, which helped net assets more than double from about $49 million. Portfolio manager John Buckingham said the fund’s considerable asset growth means expenses as a percentage of total net assets have come down.
Al Frank Management Inc. lowered the operating expense limit to 1.98% of the fund’s assets from 2.25%, according to its filing, effective Jan. 1. Buckingham said actual expenses during the past year were running closer to 2% and are currently around 1.8% because of the increase in assets.
Bringing expenses down below 2% also helps in marketing the fund to new, more price-sensitive investors, Buckingham said. “Whether or not Eliot Spitzer is around, we would still be lowering our fees,” he added.