COLUMN: Is that a pig flying? One fund lowers its fees
Last year while Wall Street investment bankers were stumbling over themselves to see just how high their bonuses could rise, one mutual fund very quietly lowered their fees. In a total reversal of Wall Street’s natural order, Davis Advisors voluntarily reduced its annual fees on Selected American Shares (SLASX) and its broker-sold New York Venture Fund (NYVTX) along with seven other Davis-run funds.
In complete disclosure my wife and I own shares of Selected Funds. Also in complete disclosure, one of my more ignorant decisions was to ignore a stockbroker’s advice to purchase New York Venture Fund. Always discuss any investment decision with a trusted professional.
Most mutual fund investors are totally unaware of a fund’s annual operating expenses. It is the equivalent of going to a football game without looking at the scoreboard. A fund’s annual operating fees are how the mutual fund makes money.
Just because you don’t write a check doesn’t mean you are not being charged. Ignoring a mutual fund’s annual cost is like fishing without watching your cork — somebody takes your bait. For the record, mutual funds with higher expenses tend to underperform their lower expense brethren.
The fee reduction will certainly be insufficient to repair the bum transmission in my wife’s RAV4 since SLASX fees dropped from 0.65 percent annually to 0.55 percent. However, the Davises are walking away from over $3 million in annual revenue. I’m not sure but I don’t recall anyone at Goldman Sachs or Merrill Lynch biting the bullet.
What makes this move a bit more unusual is the Davis family is already a low-cost leader in the mutual fund arena. According to the Wall Street Journal, the average U.S. stock mutual fund has a 1.3 percent annual expense ratio. According to Chris Davis, head of the management firm, “If we were starting those funds today, we would start out charging 0.55 percent”.
This is not the Davis’s first effort to do the right thing.
In 2004, Selected Funds eliminated 12(b)1 marketing fees for shareholders who invest $10,000 or more directly with the company. The earlier move was not initiated by Mr. Davis, but rather the company’s board of directors. The board was out of the loop of the more recent reduction. According to board chairman, Jim McMonagle, “Chris just told us Davis was cutting fees.”
Fees are a big deal.
Last November the U.S. Supreme Court heard a case involving mutual fund fees. Vanguard founder John Bagel filed an amicus brief arguing against high costs. For everyone keeping score at home, Judges Antonin Scalia and John Roberts seemed to side with the mutual fund companies (and their high fees) in opening arguments. In the same docket, the Supremes heard arguments regarding beach ownership. Like mutual fund fees, beach ownership is a big deal especially for South Walton residents. Hopefully, our Supreme Court will get both of these decisions right.
Stranger things have happened.
Correction: In last week’s column I erroneously credited former Governor Lawton Chiles as the catalyst for the expansion of Grayton Beach State Park. In fact, it was former Governor Bob Graham’s handiwork.
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net.
