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Fidelity Changes Index War Tactics

Buffalo changes micro-cap strategy and more.

Morningstar Fund Analysts, 09/22/2011

Fidelity has decided to fight the index war on the institutional front, leaving retail shareholders with less-than-rock-bottom fees.

For seven years, Fidelity has been the lowest-cost provider of international index funds for individual investors--until now. The firm said this week that it will end the voluntary fee waiver for Fidelity Spartan International Index FSIIX and allow expenses to rise to 0.20% in February 2012 from 0.10% for the retail shares. The fee is likely to stay at this level, as to go higher than 0.20% would require approval from shareholders as well as the fund's board.

After doubling the cost, the new fee will be more expensive than the retail Admiral share class of Vanguard Developed Markets Index VDMIX, which tracks the same benchmark, the MSCI EAFE Index. The Admiral share class is expected to be introduced this month and will carry the share class' typical $10,000 minimum investment for the individual investor. Meanwhile, the price tag for Schwab International Index SWISX, which tracks a slightly different large-cap benchmark, sits right below Fidelity's.

Retail Offerings

The retail price war coincides with the release of two institutional share classes of the Fidelity international index fund at the same price as Vanguard's own institutional version of the index. It seems Fidelity is willing to surrender to Vanguard on the battle over retail customers in order to capture greater share of the retirement plan market. According to Morningstar's data, as of Aug. 31 Fidelity had only about $13 billion invested in its institutional mutual fund index products. In contrast, Vanguard had nearly $250 billion in its institutional mutual fund index products (index mutual funds with a minimum investment of $5 million or more).

Institutional Offerings

To create a more robust lineup for retirement plans, Fidelity for the first time is offering index funds that will track pure small- and mid-cap benchmarks as well as index funds with emerging-markets, global (ex US), and real estate benchmarks. These five new funds will launch this month with a retail class that will cost between 11 and 18 basis points more than the institutional shares. Meanwhile, Fidelity is introducing an institutional share class and even cheaper Advantage institutional share class for Fidelity Spartan Total Stock Market Index FSKTX, and an Advantage institutional share class for its Spartan Extended Market Index FSMAX, which tracks both small and mid-caps.

Buffalo Shuffles Managers, Alters Micro-Cap Strategy
Kornitzer Capital Management, the Kansas-based advisor for the Buffalo fund family, announced a management reshuffling on several of its funds, though it's not clear whether the move will help or hinder future fund performance.

Buffalo funds use a team approach to execute their theme-based strategy. Several of the firm's managers--Kent Gasaway and Grant Sarris, for example--helped run as many as four funds. While there are a few solid Buffalo funds, for the most part they have not been category stand-outs. Whether better management focus is the answer remains an open question, but the plan is for no manager to oversee more than two strategies. So far, Gasaway has been removed from Buffalo High Yield BUFHX and Sarris has been bumped off Buffalo Large Cap BUFEX. Investors should expect more changes to come (although it looks like the flagship small-cap fund and current Fund Analyst Pick Buffalo Mid Cap BUFMX will retain its present team). Gasaway declined to put a strict time table on when all the moves would take place and denies that the moves are performance related. Instead, he said the reshuffling will open the door to in-house promotions and to new blood from outside the firm. For example, the asset manager said this week that it hired Shelly Ma, previously an international stock analyst at Scout, to co-manage Buffalo China BUFCX and Buffalo International BUFIX. Manager changes are always reason for concern, but in this case investors should have more comfort because the staffers aren't actually leaving the company.

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