4 Notable Funds That Have Lowered Fees

Karen Wallace: From Morningstar, I'm Karen Wallace. Investors paid lower fund expenses in 2016, according to a report Morningstar has recently released. Here to discuss what's driving that trend as well as some notable fee cuts is Russ Kinnel, he's director of manager research at Morningstar.

Russ, thanks for being here.

Russ Kinnel: Happy to be here.

Wallace: So, Russ, lower fees are certainly benefiting investors. What's driving this trend?

Kinnel: It's really money going into passive funds for the most part. So, we have passive funds cutting fees, and money is flowing in that direction--both ETFs and open-ends. So overall, we saw the average investor's bill went from 61 basis points to 57 basis points--that's asset-weighted. But it really shows just how dramatic that trend is, 4 basis points doesn't sound like a lot. But it's pretty rare to see that big a cut, and I think it really shows that people are really cost-aware and, of course, the move into passives and ETFs has really gained steam.

Wallace: Speaking of passive funds, Schwab Fundamental U.S. Company index cut its fees by a significant amount. Can you discuss that a little bit?

Kinnel: Sure. They cut their open-end version of their fund fees, from 35 basis points to 25 basis points--a significant cut. This is a fundamental fund which means they, instead of having market-cap weighting they weight based on sales, cash flow, and number of other factors. So, it gets you a little different exposure than market-cap-weighted fund. There is a clear value tilt and now at 25 basis points its definitely more appealing. We rate it Bronze.

Wallace: There are also some notable active funds that cut their fees. Could you discuss those a little bit?

Kinnel: Sure. FMI Common Stock is a fund we've liked for long time; we rate it Gold. It's a small mid-cap fund with sort of a value and quality mix of criteria. But they cut their fees from 1.12% to 1.04%, so an even better expense ratio. Really good fund run out of Wisconsin.

Another one that's probably little less well known is Ariel International. We rate that Bronze. They cut fees from 1.25% to about 1.13% on the individual investor; their institutional share class is cheaper. But we've been warming up to the fund. Rupal Bhansali runs it in sort of defensive focused portfolio. But if you look at the names, they are really--some of it are really off the beaten track, and so she's got a good track record here, but also before this she ran a MainStay fund with good results. So, this is a promising fund that really is below most investors' radar right now.

The final one is AllianzGI Technology. This is a fund we've liked for long time, but we always complained about the fees because its always kind of high cost. Finally, they are starting to do something about it--they have cut it from 1.31% to 1.17%. Still not super cheap, but it's at least more reasonable. You've got very experienced managers and good track record; finally fees are starting to pull their weight.

Wallace: So, these are funds that we like a lot and now we like them even better with their lower fees.

Kinnel: For sure. It's nice to see these active funds keeping pace with the times. A lot of active funds have been slow to cut fees but some of the better ones are responding to the clear trend and the competition from passive and cutting fees, and we love to see that.

Wallace: OK, great. Well, thanks so much for being here to discuss this.

Kinnel: You are welcome.

Wallace: From Morningstar, I'm Karen Wallace. Thanks for watching.