Are High-Priced Managers Worth It? Some stock pickers get paid a lot more than others. Here’s how to decide if they are right for you

March 1, 2013, 10:47 a.m. ET

FUNDAMENTALS OF INVESTING

Are High-Priced Managers Worth It?

Some stock pickers get paid a lot more than others. Here’s how to decide if they are right for you.

By CORRIE DRIEBUSCH

IF-AB069_COSTch_G_20130228141804

Investors know they have to pay higher fees for actively managed mutual funds than for index funds.

But those portfolio-management fees vary greatly from fund to fund, and investors often wonder if they will get enough bang from a costlier fund to justify the bigger buck.

Consider, for instance, the 100 largest actively run U.S.-stock mutual funds. The average portfolio-management fee—which is typically the largest component of a fund’s overall expense ratio—is 0.58% of assets a year, according to Morningstar Inc. MORN +0.28% But five of the funds charge an even 1%: Yacktman FocusedFairholmeSequoiaBaron Growth andJPMorgan U.S. Large Cap Core Plus .

Is a higher-paid manager worth it? Financial advisers and fund analysts consider things such as a fund’s track record, management style and total costs when making the decision.“There are funds where investors are getting rewarded for high fees, but…high management fees can sometimes hold you back,” says Todd Rosenbluth, director of mutual-fund research at S&P Capital IQ.

Paying for Performance

Fund specialists are often willing to accept a higher management fee for a track record of solid returns, even though that is no guarantee of stellar future results. (Reported results are net of portfolio-management and other continuing expenses.)

For instance, Ross Wolfe, financial adviser with Altfest Personal Wealth Management in New York, says the performance of Yacktman Focused is why his clients like it. The fund beat the Standard & Poor’s 500-stock index by wide margins for the past five and 10 years.

Fans say higher fees also can’t take away from the appeal of Sequoia. Its one-, three-, five- and 10-year performances exceed that of the S&P 500 and rank highly versus other funds in its Morningstar category.

“The longer the record, the more likely I am to give a high-cost fund the benefit of the doubt,” says Laura Lallos, senior mutual fund analyst at Morningstar. She says Ron Baron’s long history as an accomplished stock picker is why she likes Baron Growth despite the expenses.

By contrast, Ms. Lallos says the performance of JPMorgan U.S. Large Cap Core Plus has been “thoroughly middling,” and she doesn’t feel it justifies the high fee. The fund’s one-year and three-year annualized returns are below those of the S&P 500, although it beat the index over the past five years.

A spokeswoman for the fund says that since its inception in 2005, the fund has outperformed the S&P 500 by nearly three percentage points after fees. She says the fund offers a differentiated strategy that involves putting some assets in stocks the managers think will fall. “Shorting allows our portfolio-management team to take advantage of the best ideas of our 30-plus research analysts,” she says.

What Are You Getting?

Financial advisers agree that the JPMorgan fund’s strategy is more complex, and that investors need to consider that when evaluating the fund’s fee.

 

What you don’t want to do, they say, is pay steep fees for fund managers whose holdings and performance hug tightly to their benchmarks—so-called closet indexers. Look closely at what you are getting, they say.

Fairholme manager Bruce Berkowitz, for instance, runs a concentrated fund, with big bets on individual stocks and sectors. “This is a fund where you’re paying for the risk being taken,” says Mr. Rosenbluth.

The risks don’t always pay off, of course. After several strong years, Fairholme’s big bet in the financial-services sector cost it in 2011, when the fund tumbled more than 30%. Mr. Wolfe pulled client money out of the fund due to concerns that Mr. Berkowitz’s strategy “veered off the beaten path.” Fairholme bounced back strongly last year, with its 36% return more than double that of the S&P 500.

Fairholme didn’t respond to requests for comment.

One appeal of Sequoia is a lower-risk approach that may limit losses in ugly markets. “I think there is an inherent measure of safety in Sequoia because they’re buying stocks that are good value,” says Andrew Goodman, chief investment officer of CIC Wealth Management Group in Gaithersburg, Md.

Sequoia didn’t respond to requests for comment.

Portfolio-management fees are just one component of a fund’s overall expense ratio. Some fund managers may commit to cover additional expenses as part of their fee. At Fairholme and Sequoia, for example, the total expense ratio is also 1%.

By contrast, JPMorgan U.S. Large Cap Core Plus has total expenses of 1.4% on a standard share class for individual investors, while Baron Growth’s total expenses are 1.3%.

A spokesman for Baron Growth says the fund’s expense ratio is in line with its Morningstar category and that its management fees are used to “attract and retain a first-rate investment-management team that has delivered exceptional long-term performance.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: