The High Price of a Fund's Popularity

Delaware Decatur Equity Income  is growing. Delaware Devon , Delaware Core Equity , and  Delaware Growth & Income  are merging into the fund. Those mergers will raise Decatur Equity Income’s assets a little more than 50%, from $1.028 billion to $1.638 billion.

So, shareholders are in for a big break on expenses, right? Nah. Decatur Equity Income’s expenses after the merger will actually go up--from 1.11% to 1.23%. That's right: It's got diseconomies of scale. I think the firm really should revisit its IT spending, because generally it works the other way around. Either Delaware is horribly inefficient or it is looking to boost its profits.

If you wonder how fees at many funds have stayed stubbornly high in the face of tremendous asset growth over the past 10 years, this fund is a good example. Somehow, Decatur Equity Income’s board of directors decided that the merger and the imposition of higher fees would be an improvement for shareholders.

Given the fund’s subpar returns over the past five- and 10-year periods, you’d think shareholders would be entitled to a fee cut.

To be sure, there are much more dramatic cases of fund board inaction. There was the  Ivy International (IVINX) board, which signed off on Ivy’s plan to fire value maven Hakan Castegren and replace him with a growth manager in 2000 because Castegren wanted to keep the fund closed to new investments. There’s  Munder NetNet (MNNAX), whose board allowed the fund’s expense ratio to shoot past 2% even though the firm had cut staff and returns were awful. It currently charges 3.08% on an asset base of nearly $1 billion.

The Delaware example is more typical, though, of the slow uphill march fund fees have taken for the past decade. It’s not the sort of outrage that will lead angry shareholders to form a mob with pitchforks and torches. Rather, it’s just pretty hard to defend.