Earlier this year, two mutual fund management companies, American Guardian, Inc. and Best Management, Inc. entered into an agreement under which American Guardian would purchase all of the issued and outstanding stock of Best Management and merge Best Management into American Guardian. Although the companies are now combined, there are still two separate boards of directors for the funds. Each fund complex retained the same independent board members previously elected by the shareholders, but company-appointed directors were reevaluated and will be consistent for both boards. The combined entity, Best American Management, is now in the process of reviewing existing products and services and looking for opportunities to leverage its increased size.
American Guardian was a 30-year old Boston-based mutual fund complex. This fairly staid, conservative company was well known but had not been particularly innovative in fund distribution or shareholder servicing. It had historically chosen to distribute mainly through broker- dealers and outsourced its transfer agent process. The relatively new CEO of American Guardian firmly believed that in today’s highly competitive environment, mutual fund complexes must “grow or die.” He saw an acquisition as a necessary step to ensure that his firm’s products and services would be attractive to investors and their advisers in the future. Read the rest of this entry »
The Problem
Since the beginning of 1997, the U.S.-sold Japan Fund has experienced substantial cash inflows and outflows from investors, and portfolio manager David Smith has voiced his concern recently about the volatility. He also noted that extremely large shareholder orders seem to coincide more and more with news affecting Japan, and cash flow management is taking up a large percentage of his time that might otherwise be spent selecting securities.
Smith suspects some shareholders are trying to increase their profits by “timing” the market—quickly moving their money from one fund to another within the complex. Furthermore, he speculates that these investors might be attempting to profit from the methodology that the fund complex uses to compute the daily NAV of the fund by trading on stock price information that may become available between the time when the Japanese markets close and the time the fund values its holdings. Read the rest of this entry »
In reviewing the expenses of mutual fund investors, it is useful to distinguish between expenses paid directly by shareholders as individual investors and expenses paid by the fund itself (which are paid indirectly by all fund shareholders). In general, fees related to distribution and redemption are paid by shareholders at the time of a specific event, while fees related to management and service are paid by the fund on an annual basis. But this general rule has a few exceptions—most important, 12b-1 fees, which are continuing distribution charges borne by funds as a percentage of their assets.
Sales loads are the most significant fees charged to shareholders individually. Sales loads are paid to the fund distributor, usually affiliated with the fund management company, and mostly passed on to the broker who helped close the sale. The maximum sales load is 81A%, though as a practical matter, sales loads now average 4% or 5%. Historically, all sales loads were paid by shareholders when purchasing fund shares at the front end of their investment and therefore were called front-end loads. Read the rest of this entry »
In addition, the composition of equity funds changed during the 1990-2000 period. According to Strategic Insight, broader investment objectives such as growth and growth & income experienced a decrease of 7.7 percentage points in share of equity funds during the decade. The decrease was offset by an increase in more specialized funds, with higher management fees, such as sector funds and international funds. In particular, emerging market and country funds went from a half-percent share of funds 110P available in 1990 to almost 3% in 2000. At the same time, there was a substantial increase in lower management fee products such as index funds, which were almost nonexistent in 1989.
2. Number of funds During the 1990s, fund choices grew alongside assets at a rapid pace as the number of mutual funds increased from around 3,000 to over 8,000.
Implications of this tremendous increase in the number of funds for management fees depend on the resulting trends in average and median fund size, as shown in Table 2 (which defines a fund to include each class of a multi-class fund). Read the rest of this entry »
