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Speaking of Your Fees 07_06_03
The Magellan fund is considered an actively managed fund although appearances are deceiving. Investors have found themselves, some unwittingly through their 401(k) plans, to be paying more for what is available in a passively managed fund such as an index. The way it works is simple. Fidelity has realized that loads are not as profitable as they once were. Folks including the 401(k) investors tend to "park" their cash and leave it. This means that the fund collects once from the investor. Left with the appearance of possibly losing potential new customers put off by these loads, dropping them seems like the right thing to do. But there are more reasons behind this apparent altruistic maneuver. Fidelity knows that the real money lies in the fees. They are not alone in this revelation as more than one fund company has realized that the real money comes from asset gathering and the fees that are associated with this type of investing. These funds pay their managers from investor returns and investments. These fees are charged on huge asset bases which when counted in the billions adds up significantly. The payment of performance bonuses to their managers give the distinct impression that the fund is encouraging their managers to beat the index they are closely associated with. The problem is why pay these additional fees, which Fidelity racked in to the tune of $344 million last year when a passively managed index fund, the benchmark for many of the actively managed variety, charges so much less? How does the fund company think it will do with this new change in strategy. Cited by example from FundExpenses.com, the Contrafund and its sister, Contrafund II had similar problems charging load fees while investors voted on performance with their feet. The Contrafund dropped the load charge while II held on to the 3% front end fee. The comparisons are staggering. Both funds were bleeding outflows of cash. Since the dropped fees went into effect on the Contrafund, inflows have increased ($78 million in April) while the II fund continues to see folks walk. As long as folks are so easily duped into believing that the fund always has your best interest in mind, they will continue to play these financial shell games with your money. Dropping the load did not increase the performance or the return on shareholders investments. In fact, it did nothing but create the illusion of a better place to pay for what index investors receive for next to nothing. The question you need to ask yourself is: Has my fund beaten the benchmark they compare themselves to not only in terms of performance but also in costs? |