492 / 708
10
October saw another episode of fee wars. BlackRock
cut fees at a number of its exchange-traded funds
to dirt-cheap levels.
IShares Core S&P 500
IVV
was
cut to
0
.
04%
from
0
.
07%
, and
iShares Core MSCI
Emerging Markets ETF
IEMG
was cut to
0
.
14%
from
0
.
16%
. Schwab responded by lowering some of its
ETF
prices to
1
basis point below iShares’. Prudential
then cut fees at some actively managed open-end
funds. And you may recall that Fidelity cut fees at its
open-end and
ETF
index funds in June.
Yes, there’s a powerful trend that’s giving a better
deal to investors across an array of funds. As technol-
ogy makes investing cheaper, it’s natural for fund
companies to share some savings. And of course, the
spread of passive investing means you have more
low-cost options than ever before.
Yet, remarkably some fund companies and their fund
boards haven’t gotten the memo.
One of them is BlackRock. The same company and
board that cut fees for some funds has stubbornly kept
others surprisingly high.
IShares MSCI Emerging
Markets
EEM
tracks a slightly more diffuse index than
IEMG
, and it charges nearly
5
times (
0
.
69%
) for the
service. Effectively, BlackRock and the iShares board
are asking shareholders of this fund and others in
the lineup to subsidize the cheaper core funds. Their
fiduciary duty is the same to both groups, but I
guess that hasn’t been mentioned. See the table for
more examples of pricing disparity at iShares.
Oppenheimer and the board overseeing
Oppenheimer
International Small-Mid Company Fund
OSMAX
are also out of touch. The fund is a focused portfolio of
small- and mid-cap stocks that is prone to extreme
performance. Lately that’s been “extreme” in a good
way. The fund had a rough
20%
loss in
2011
and
a middling
2012
(Rezo Kanovich took over in January
2012
), but it crushed its category three straight years
from
2012
through
2015
. That run brought buckets of
cash. The fund took in
$500
million in
2013
,
$700
million in
2014
, and
$2
.
8
billion in
2015
(equal to the
asset level where the fund started the year).
Those inflows inspired Oppenheimer to decide it
should have its cake and eat it, too. The flows forced it
to change the fund’s name and benchmark from
Small Cap to Small-Mid, and it closed the fund to new
investors. But with all that money and no need to
attract new investors, why not raise fees? Oppenheimer
cranked up the fund’s expense ratio to
1
.
43%
from
1
.
18%
. Back when the fund had just
$600
million
in assets, it charged
1
.
14%
in fees. But apparently this
is the only fund with diseconomies of scale, as it
needs to charge more with
$6
.
8
billion in assets. To put
that in dollar terms, it is now paid
$97
million per
year rather than
$7
million. For the record, Oppenheimer
says that the broader benchmark necessitated the
fee hike. It added one new analyst at the time of the
fee hike, giving the fund a total analyst staff of two.
So, maybe it is paying that analyst
$90
million.
For investors, this suggests how important it is to
watch their funds’ expenses and keep an eye out for
cheaper alternatives as more fund companies com-
pete on cost. For fund companies, it’s time to decide if
they want to be relegated to the role of niche players
or compete with the best.
K
Fund Companies Headed the Wrong
Way on Fees
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.
Examples of Pricing Disparity at iShares
Name
Ticker
Morningstar Category
Expense Ratio (%)
iShares Core MSCI Emerging Markets IEMG
Diversified Emerging Markets
0.18
iShares MSCI Emerging Markets
EEM Diversified Emerging Markets
0.69
iShares Asia/Pacific Dividend
DVYA
Diversified Pacific/Asia
0.49
iShares Core MSCI Pacific
IPAC
Diversified Pacific/Asia
0.11
iShares Core MSCI Europe
IEUR
Europe Stock
0.11
iShares Europe
IEV
Europe Stock
0.60
iShares Core MSCI EAFE
IEFA
Foreign Large Blend
0.12
iShares MSCI EAFE
EFA
Foreign Large Blend
0.33
iShares Core S&P 500
IVV
Large Blend
0.07
iShares S&P 100
OEF
Large Blend
0.20
iShares Core S&P Small-Cap
IJR
Small Blend
0.12
iShares Russell 2000
IWM Small Blend
0.20
Data as of Oct. 31, 2016.