PIMCO's Freshly Cut Fees

On May 1, PIMCO cut the administrative fees for 66 share classes of 18 funds between 0.05% and 0.15% each. PIMCO says the firm is in the process of streamlining its operations by taking over distribution of its retail share classes from parent-company Allianz and combining its functions with PIMCO's existing institutional share-class distribution infrastructure. The company says the fee cuts are an outgrowth of cost savings expected from that plan. Morningstar estimates that investors will save roughly $40 million per year overall, based on the magnitude of the cuts and the current level of assets in the affected funds.

PIMCO's fee issues are not trivial. The firm's retail share classes have long charged more than average in many cases, and those prices haven't typically moved much, even when funds have grown extremely large. While fee cuts of any size are good for shareholders, we wanted to take a closer look at just how much of an impact this latest move might have for specific funds. When we looked at their current Morningstar Fee Level Scores (which are used in the fee grade portion of the Morningstar Stewardship Grade) and compared them with their expected postcut scores, we found that of the 66 distinct share classes of funds affected, 19 of them dropped into a lower-fee quintile as a result of their price cuts. Before the cuts, 11 of those 19 were of average price (defined as the middle quintile, or 40th to 60th percentile) or cheaper relative to their respective peer groups. In the wake of the cuts, 16 of those 19 are now of average price or cheaper.

Of course, the dollar-amount impact for each investor depends on the size of his or her account. An individual with a $100,000 stake would save $50 per year in a fund that has enjoyed a 0.05% fee cut, $100 from a 0.10% cut, and $150 from a 0.15% discount. Depending on the particular fund, savings of 0.15% per year could add up to more than $1250 over ten years time for an account with $250,000.

By those metrics, PIMCO has taken an important step to make this handful of funds more competitive in price. Notwithstanding PIMCO's stated reasons for the cuts, it's possible that competitive pressure to reach more investors played a role as well.

Lowering mutual fund fees automatically increases postexpense returns. Lowering fee hurdles is especially relevant for bond funds, meanwhile, because market yields are particularly slim right now, and the specter of rising interest rates threatens to pound away further at future bond-fund returns. Even given Bill Gross' recent moves to dampen interest-rate risk in many portfolios, PIMCO's intermediate- and long-term bond funds, such as  PIMCO Total Return , would still likely be more sensitive to rate volatility than most short-term bond funds. With a lower expense hurdle to overcome, funds of that ilk become more compelling purchase options for investors.

However, a closer look at the list of funds shows that PIMCO didn't focus its cuts exclusively on interest-rate sensitive offerings. While it's difficult to draw specific conclusions about the firm's rationale for choosing where to apply fee reductions, it's possible that some of these choices were a strategic response to current investor tastes. Specifically, the fear of rising rates appears to be turning some investors away from core bond funds and toward strategies that at least promise to try and shield their assets from interest-rate volatility.

Regardless of motivation, PIMCO's decision deserves recognition. Given the firm's prominence among fixed-income and institutional investors, it's fair to say that PIMCO would likely have been able to forgo the fee cuts without doing any harm to its overall business. However, it would be premature to congratulate PIMCO too loudly. The firm still has a long way to go before being competitively priced across the board. Sixty-six of its 432 share classes are cheaper now, but nearly 100 are still expensive relative to their peer groups. That leaves PIMCO--and its board, in particular--with plenty of work left to do.