208 / 708
14
Fund Fees Declining
U.S. investors paid lower fund expenses in
2015
than
ever before. For open-end and exchange-traded
funds combined, the asset-weighted average expense
ratio across funds (excluding money market funds
and funds of funds) was
0
.
61%
in
2015
, down from
0
.
64%
in
2014
and
0
.
73%
five years ago. This decline stems
from investor demand for cheaper passive funds (index
funds and
ETF
s) and strong flows into institutional
share classes, which carry lower fees. Vanguard also
contributed to average fee declines, as its low-cost
passive funds continue to attract large flows.
The asset-weighted average expense ratio is a better
measure of the average cost borne by investors
than a simple average (or equal-weighted average),
which can be skewed by a few outliers, such as
high-cost funds that have low asset levels. In
2015
, the
simple average expense ratio for all funds was
1
.
17%
, but funds with an expense ratio above that level
held just
8%
of fund assets at the end of
2015
. If
we look at the largest
1
,
000
share classes, which
account for about
75%
of assets in mutual funds and
ETF
s, the simple average expense ratio remained
at
0
.
64%
from
2013
through
2015
, as some fees go up
and some go down. This finding suggests that, in
aggregate, changes in the fees set by asset manage-
ment firms across the industry are not contributing
to the falling asset-weighted average expense ratio.
Indeed, active funds have seen larger asset-weighted
average fee declines when compared with passive
funds. This might lead to the conclusion that fee declines
among active funds are driving overall fee declines,
but this has not been the case. Instead, it has been
flows out of more-expensive funds (often active funds)
and into cheaper funds (primarily passive funds)
that have resulted in lower asset-weighted average
fund fees.
Fund Manager Changes
Fund News
Fidelity Municipal Income FHIGX
Impact: Neutral
Date: 05/02/2016
Lead manager Jamie Pagliocco stepped down from the firm’s muni funds to take a position heading the firm’s
fixed-income trading group. Comanagers Mark Sommer and Kevin Ramundo, who have managed muni funds
at the firm since 2002 and 2010, respectively, were named managers on the firm’s entire suite of muni funds.
Joining the duo as a new portfolio manager is Cormac Cullen, a senior member of the firm’s muni research
team.
Our Take:
We have faith in the seasoned team that Pagliocco leaves behind and are encouraged that past
transitions in Fidelity’s muni group have been quite smooth. We are maintaining our
Œ
rating on the fund.
Janus High-Yield JAHYX and Janus Flexible Bond JAFIX
Impact: Negative Date: 03/31/2016
Gibson Smith left Janus. Comanager Darrell Waters took over as lead manager.
Our Take:
We have downgraded
the funds to
ˇ
as this is a big blow to two formerly appealing funds. Smith built up Janus’ bond effort over
the past 12 years and was vital to the team.
Sequoia SEQUX
Impact: Negative Date: 03/23/2016
Bob Goldfarb stepped down as comanager in the wake of the implosion of top holding Valeant Pharmaceuticals
VRX. Sequoia explained that decision-making was too centralized and didn’t give enough room for analyst input.
Our Take:
Goldfarb achieved a lot for investors even though he may be best remembered for the Valeant mess.
Moreover, the latest bad news on Valeant makes it clear that Sequoia’s thesis was wrong—up until this point
we didn’t know if Valeant’s problems were small or large. We have lowered our rating to
´
from Gold.
T. Rowe Price Health Sciences PRHSX
Impact: Negative Date: 07/01/2016
Manager Taymour Tamaddon is moving to run T. Rowe Price Institutional Large Cap Growth TRLGX. Ziad Bakri
will take his place on July 1, 2016. Bakri has been a healthcare analyst with the firm since 2011. He is
an M.D. and had previously worked as a biotech analyst for Cowen and Co.
Our Take:
This is a challenge for
T. Rowe because it follows the loss of a manager and two healthcare analysts in 2014. The firm says it
plans to hire additional analysts. This is Bakri’s first time serving as a portfolio manager.
T. Rowe Price Small-Cap Stock OTCFX
Impact: Negative Date: 10/01/2016
Greg McCrickard is set to retire in October. He will be replaced by Frank Alonso, who has been an associate
portfolio manager on the fund since 2013. Alonso has been with T. Rowe Price since 2000.
Our Take:
We don’t have much of a track record to go by for Alonso, so it’s a big drop from the proven McCrickard. We
lowered our rating to
ˇ
from Silver.
Vanguard Strategic Equity VSEQX
Impact: Neutral
Date: 01/28/2016
James Troyer has stepped down as manager. Binbin Guo was promoted to comanager, and he will run the fund
along with Michael Roach and James Stetler, who were named comanagers in 2012. Troyer will remain on
the team, however. This is Guo’s first time as a named manager, but he has been with Vanguard since 2007 and
has headed the equity research and portfolio strategy team at Vanguard’s Quantitative Equity Group since 2010.
Our Take:
Troyer is still on the team, so this doesn’t alter our view of the fund.
Virtus Emerging Markets Opportunities HEMZX
Impact: Negative Date: 05/31/2016
Virtus Foreign Opportunities JVIAX
Former Morningstar Fund Manager of the Year winner Rajiv Jain is leaving subadvisor Vontobel to set up his
own firm. Matthew Benkendorf, who has been at Vontobel for 17 years, is taking over. Benkendorf signed
a 10-year contract when Jain resigned, so we can at least be sure that he won’t be following Jain. We don’t
yet know if any of the team’s analysts will leave.
Our Take:
Losing Jain is a big blow, though Benkendorf
is experienced and a fair amount of the team will most likely remain in place. We lowered ratings for both
funds to
´
from Silver.