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Chris Browne Steps Back at Tweedy, Browne

Plus, Putnam cuts expenses, outlooks from Bill Gross and Jeremy Grantham, and more.

Morningstar Analysts, 08/03/2009

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

Value investment shop Tweedy, Browne announced on Thursday that longtime managing director Chris Browne has stepped back from day-to-day responsibilities at the firm. He had served as one of five portfolio managers on Tweedy, Browne Value TWEBX, Global Value TBGVX, and Worldwide High Dividend Yield Value TBHDX. Browne was also a member of the firm's management and investment committees. He will keep his equity stake in the firm and take on a new role as senior advisor, and according to Tweedy, Browne, will leave most of his investments at the firm. Browne joined the firm in 1969.

Although losing Browne's experience and skill set on a day-to-day basis is certainly a disappointment for fund shareholders, Morningstar remains confident in the funds. Associate director of fund analysis Bridget B. Hughes, who has covered Tweedy, Browne for more than five years, says, "The managers have long worked collaboratively, and many of the analysts have been with Tweedy for some time. It's truly a team effort here, and the remaining investment prowess is still impressive."

Putnam Cuts Management Fees
This week, Putnam Management announced that it is lowering expenses for all Putnam funds by reducing their management-fee portion. Bond and asset-allocation funds will be impacted the most: Management fees for bond funds will be cut 13%, and asset-allocation funds' fees will decrease 10%. Putnam is also introducing fund family breakpoints, which are discounts tied to overall asset growth at the firm. While many mutual funds offer management-fee breakpoints as a fund's assets reach certain levels, it is less common for those breakpoints to be tied to a collection of funds. Finally, management fees for Putnam's U.S. growth funds, international funds, and Global Equity PEQUX will now contain a performance fee adjustment, which will raise or lower the level of the management fee based on a fund's performance relative to a specified passive benchmark. The funds will charge more when they perform well and less when they perform poorly. We think performance fees, when structured correctly and tied to appropriate indexes, help to further align an advisor's interests with fundholders'. These changes are welcome in the current environment, given that many other funds' fees are pushing higher rather than lower in the face of significantly reduced asset levels. All expense cuts are effective Aug. 1, 2009.

Vanguard Wellington Expenses to Rise
Meanwhile, Vanguard CEO Bill McNabb noted in a recent letter to shareholders that the expense ratio for the investor share class of 80-year-old Vanguard Wellington VWELX will increase this year, to 0.37% from 0.29%. At first glance, this seems like a modest uptick and is still extremely low for the large-value category. However, Morningstar's data on this fund goes back to 1975, and a quick check reveals that this is the first increase in the fund's expense ratio since at least 1975.

Bill Gross on Fees and New Normal GDP
Bill Gross of PIMCO released his August Investment Outlook on Wednesday. Gross criticizes the high fees charged by many fund managers, especially in light of the big cut fees will take out of returns in PIMCO's "New Normal," which envisions returns dropping to around 6%. He also predicts a new normal nominal GDP of 3% (versus the 5% GDP growth we've experienced for the past 15 or so years), leading to "lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model."

Grantham's Outlook
Jeremy Grantham's quarterly letter also came out this week. The GMO chairman reports that the firm reduced its seven-year forecasted return for the S&P 500 Index to 4.8% real compared with its 5.7% estimate at fair value, suggesting the S&P 500 is currently above fair value. He also writes that U.S. blue chips are a great bargain right now and suggests that emerging-markets equities will "sustain and increase their overpriced level relative to the rest of the world." Grantham also discuses what he terms the biggest factor limiting future growth: the scarcity of resources.

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