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Two new developments may spark trends that will lead to clarity on fees paid by fund investors. Dreyfus has eliminated sales of B shares, and Lehman Brothers is reportedly moving ahead with efforts to unbundle brokerage commissions from research.
Dreyfus' move to eliminate sales of B shares makes it the second fund company to do so. Franklin-Templeton eliminated B share sales in 2005. The moves help to ensure that investors understand what they're paying in commissions. B shares are designed to take the traditional front-load commission and spread it out over time through the expense ratio. Depending on their design and the timeframe involved, some B share purchases can produce equivalent, or even better, results for shareholders.
However, few B share structures fit that description, and overall, their sale has opened up a Pandora's box for abuses by brokers. The simplest problem that B shares create is that many investors think that they didn't pay a commission and got no-load shares because they didn't pay an up-front fee. Sometimes, this was simply a matter of confusion, and other times it was a result of deliberate deception.
Another common abuse has been that brokers eager to capture the highest commission possible have sometimes put clients in B shares when they would have been entitled to lower commissions had they bought A shares. Fund companies include commission breakpoints with A shares so that investors buying large sums pay a reduced commission or no commission at all.
For example, a fund might cut the load in half for an investor buying $500,000 or more. But some brokers have been caught putting clients in B shares (which don't have a way of reducing commissions) when they have more than that amount. In some cases, brokers would fill multiple orders just below the $500,000 level in order to avoid detection.
The NASD has brought a number of enforcement actions against brokers who took such actions. In addition, brokerage firms and fund companies alike have become more vigilant in policing sales of B shares. A number of fund companies have also lowered the maximum amount allowed in B shares in order to make abuses much more difficult.
The moves by Franklin and Dreyfus are good news for fund investors, because it's easier to understand the commission in A shares and investors are generally less susceptible to abusive sales practices.
Meanwhile, Lehman Brothers is following up its landmark deal with Fidelity to unbundle research and commissions by talking with other asset managers about a similar deal. Currently, most mutual funds pay for Wall Street research with soft dollars, which take the form of higher trading commissions. These come out of fund investors' pockets but are not included in the expense ratio. That's because the brokerage commissions that a fund incurs every time it buys or sells a security come out of fund assets yet are not among the expenses counted in the expense ratio.
Fidelity pushed Lehman to charge it separately for research, and now Lehman is in talks with other firms regarding a similar deal, according to The Wall Street Journal. Fidelity is also in talks with other Wall Street firms about cutting similar deals. Fidelity says the deal enables it to lower the brokerage commissions charged to its funds.
Fidelity Offers New International, Retirement Funds
Fidelity recently issued a preliminary prospectus for a new foreign fund, Fidelity International Value, expected to launch May 1. The fund will use traditional value measures, such as price/book, price/sales, and price/earnings ratios, to pick stocks. George Stairs, who previously ran money for crosstown rival Putnam Investments, will captain the ship.
Although we're usually skeptical when fund companies launch funds focused on asset classes that have been on long winning streaks--as foreign value stocks have been--this is a legitimate and potentially useful fund. We're also encouraged to see more style-based differentiation in Fidelity's foreign-fund lineup. We don't have complete confidence, however, in Stairs, who was on the management team of Putnam International Growth & Income
Fidelity also added two more funds to its lineup of target retirement funds, Fidelity Freedom 2045 and Fidelity Freedom 2050. The funds are expected to launch in June. They are ideally suited for investors retiring within 10 to 15 years of the target date or for people who are currently in their 20s. The other Fidelity Freedom funds offer good exposure to most asset classes of the market, including real estate investment trusts and commodities. These portfolios own too many funds, though, and most of them are mediocre at best. Fidelity has made some improvements to its Freedom funds lineup, but we still think some of the underlying options in the Freedom portfolios are subpar.
Fidelity Contrafund Manager Invests $1 Million in Fund
A new filing from Fidelity reveals that Fidelity Contrafund
The filing also revealed that Danoff runs about $81 billion in total. Contrafund is about $64 billion of that total.
A new filing for Fidelity New Markets Income
New American Century Funds
American Century filed documents with the SEC this week for three new growth funds: Focused Large-Cap Growth, which will only divide up assets among 25-30 stocks; Large-Cap Growth, which will target a portfolio of about 50 stocks; and Multi-Cap Growth, which will own 100-odd companies.
The funds will use a quantitative investment strategy that focuses on stocks with rapidly improving earnings. Harold Bradley and Sheila Davis will run the fund. Bradley is an American Century veteran since 1988 and will comanage the fund in addition to his other charge, small-cap growth offering American Century New Opportunity
Bond Takes a Beating, Leads to Losses for Top Holders
Automotive supplier Dana
This could spell trouble for top bond owners. As of Dec. 31, the top 2009 owner is Smith Barney High-Income
Frontier Equity Lists Brother-in-Law as Independent Director
Less encouraging is the high-cost, small-asset Frontier MicroCap
Also discouraging is the fact that only three directors, including manager Joel Blumenschein, invest in the fund, and the trio only made it into our lowest category of between $1 and $10,000. The filing also stated that officers and directors of Frontier as a group own less than 2% of the shares of the fund.
T. Rowe Price GNMA to Invest in Non-government Mortgages
T. Rowe Price GNMA
Senior analyst Scott Berry applauded the move because other funds with similar structures have been able to boost returns without taking on much more risk.
Who's the Worst?
The fund with the biggest year-to-date loss is Potomac Small Cap/Short