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Big Price Tags, Small Manager Investments

The managers of these costly funds aren't heavily invested in them.

Greg Carlson, 01/04/2011

Morningstar has conducted multiple studies demonstrating that fees are the best predictor of returns. It's particularly disappointing then when managers of expensive funds don't invest heavily in them; Morningstar strongly believes that a significant level of ownership better aligns managers' interests with those of shareholders. Let's take a closer look at some funds in this situation.

Managers Micro-Cap MMCFX
This fund's expense ratio was recently 1.53%. That's pretty lofty compared with the median 1.20% expense ratio for no-load small-cap stock funds. The fund was actually a bit more expensive in the past when its asset base was substantially larger, so at least fees are on the decline despite fewer economies of scale. However, it's still far above the norm. And none of the managers at any of the four subadvisors who divvy up the fund's assets own a single share of it, according to its most recent Statement of Additional Information. One of those subadvisors came on board in December 2009, and portfolio managers' holdings in the fund were last disclosed as of October 2009. But the 11 managers from the other subadvisors have all worked on the fund since December 2007, so they've had time to build up stakes in it. They simply haven't.

While it's true that subadvisors are less likely to invest in funds they run, that's no excuse. There are a number of subadvisors who own hefty stakes in their charges, such as Jim Barrow of Vanguard Windsor II VWNFX, and Bill D'Alonzo, David Herro, and Dick Weiss of the Masters' Select funds.

Wasatch Ultra Growth WAMCX
At 1.68%, this fund is nearly 1.4 times as pricey as the typical no-load small-cap fund. Granted, the fund has generated peer-beating returns over the very long haul despite that high price tag, but it's generally been closer to 1.5% for much of its history.

Meanwhile, manager Ajay Krishnan had between $100,001 and $500,000 invested in the fund at the end of 2009. That's not a small amount on an absolute basis, particularly for a small-cap fund. But given his 16-year tenure at Wasatch, including 10 years as manager of this fund and the firm's intense focus on smaller companies, it's fair to expect a larger commitment. It would make the fund's expense ratio a bit easier to swallow.PAGEBREAK

Putnam Multi-Cap Growth PNOPX and Putnam Growth Opportunities POGAX
These large-growth funds are both on the pricey side at 1.29% and 1.32%, respectively; each one charges more than 60% of all broker-sold large-cap funds. Those are tough hurdles to overcome in an arguably more efficient part of the stock market. In addition, both funds are run by the same manager, Robert Brookby. He's steered the smaller Growth Opportunities since January 2009, and after a solid start there, he was tapped to take over the $3.5 billion Multi-Cap Growth in April 2010. As of Growth Opportunities' November 2009 Statement of Additional Information, he had between $100,001 and $500,000 invested in its shares. Not bad, but given the fund's aims to be a core holding and Brookby's five years as a portfolio manager, we hope to see a bigger stake in the future.

AllianceBernstein Growth AGRFX
This fund charges 1.54% to owners of its A shares--an exorbitant amount for a front-load large-cap fund with more than $600 million in assets. And the fund has clearly had difficulty overcoming that cost drag over periods of three years or more. Its managers don't pay much of the fund's expenses, either. As of July 31, 2010, William Baird (who's served on the fund since late 2006) had between $100,001 and $500,000 stashed in the fund, while Vadim Zlotnikov had between $50,0001 and $100,000 invested in its shares. Meanwhile, Frank Caruso didn't own a single share of the fund. Amy Raskin joined as a fourth manager in November 2010 on the date of the fund's last SAI.

A version of this article appeared in the November 2010 issue of Morningstar FundInvestor.

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