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The Astonishing Economics of Big Funds

These funds are raking in hundreds of millions of dollars each year.

Karen Dolan, 12/22/2009

We've spilled a lot of ink over the years discussing the importance expenses should play in your investment decision. A fund's levy is taken right out of your returns and is the most reliable predictor of future performance studied to date. Expenses are typically expressed as a percentage of net assets (a fee of 1.00% translates into a cost of $1 for every $100 invested) and for all intents and purposes, that is the most useful way to look at them.

Yet, it can be telling to view fees through a dollars-and-cents lens, too.

Rolling in the Dough
Running a big fund isn't cheap or easy. There are legal, record-keeping, printing, and customer-service requirements. But those costs are miniscule compared with the two biggest line items for most funds: management and distribution. Some funds have to pay for inclusion on a big no-transaction-fee platform like Schwab's or Fidelity's or a fee to advisors who sell the fund, for example. The typical stock fund pays 35 to 40 basis points to be on those NTF platforms. Some charge 12b-1 fees to cover the cost and others pay it from their management fee. The accounting between management and distribution is fuzzy, and we'd like to see funds adhere to a stricter reporting standard, so we could obtain a true picture of how fees are divvied up between management activities that help performance and marketing activities that grow the fund.

Overall, however, you may be surprised to see just how much money funds that charge a little can actually rake in. We dug into the financial statements of the biggest funds by assets and highlighted 20 that pulled in the largest amount of fees in their most recent fiscal year.

Funds Bringing in the Highest Fees in Absolute Dollars

Who Made the List and Who Didn't?
It's good to be the biggest mutual fund. PIMCO Total Return's PTTRX fees broke the billion dollar threshold in its latest fiscal year. And that is just what this fund alone brings in for PIMCO. If you consider all of the institutional separately managed accounts and portable alpha offerings that are hinged on Bill Gross' Total Return strategy, the amount of money is much, much larger.

American Funds dominated with eight of its funds ending up on the list, each drawing in more than $300 million in fees. Growth Fund of America AGTHX was king within American's lineup. The $150 billion fund charged more than $1 billion in its latest fiscal year. A large portion, nearly $400 million, went to pay the financial advisors who hold the fund in client accounts and $350 million in management fees went directly to the fund's advisor, Capital Research.

Notably, Vanguard is not on this list. Though five of its funds are in the top 20 for assets, none land in the top 20 for total fees pulled in. That's not a surprise. Vanguard runs several inexpensive index strategies and manages funds at cost. Its largest actively managed fund, Vanguard Wellington VWELX, which has $47 billion in assets, brought in a total of $117 million. That's not paltry by any stretch of the imagination, but it is significantly less than all of the above-mentioned offerings and then some.PAGEBREAK

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