A version of this article was published in the June 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.
A rising stock market tends to boost fund assets and cause fees to drift lower, but for various reasons certain funds unfortunately buck that trend. Let’s take a closer look at some funds that have boosted their expense ratios in the past couple of years.
Alger Spectra's SPECX cheaper share classes earn Morningstar Analyst Ratings of Bronze because of veteran lead manager Patrick Kelly's savvy use of the firm's growth-investing expertise, which has resulted in solid long-term returns. But the fund has seen substantial outflows of late: roughly $2 billion in the trailing three years ended May 2021. Owing to capital appreciation, the fund's asset base nevertheless grew during the period. But fees have climbed; the A shares, for example, charged 1.27% in the fund's 2018 annual report, but that price tag climbed to 1.40% by 2020. (The other four share classes saw similar fee increases.) The fund wasn't cheap previously, but now all five share classes are more expensive than at least 90% of U.S. large-cap peers.
Virtus AllianzGI Technology DRGTX, which earns a Silver rating, has always been run by the seasoned team of Huachen Chen and Walter Price. (Comanager Michael Seidenberg joined in 2018.) It invests in a sector that, until 2021, performed quite well in recent years, so despite modest outflows, its asset base grew pretty steadily before a huge 70% gain in 2020 gave it a big boost to $2.5 billion at the end of that year. (It is now $2.4 billion.) Nevertheless, the expense ratio for the Institutional shares rose to 1.14% from 1.07% in 2018, and that's still more expensive than 80% of its peers in the specialty institutional group and well above the 0.93% median. The fund had a fee waiver keeping a limit on expenses, but it has been phased out.
Boston Partners Long/Short Research BPRRX, like other long-short equity funds, has been left in the dust by the strong equity rally that has marked most of the past 12 years. Its 2020 performance was particularly weak because it was long value and short growth. It suffered a net $5.4 billion in net redemptions from 2018 to 2020, and its asset base shrank to a recent $837 million from $7 billion at the end of 2017. The fund's Investor shares already charged a lofty 2.34% in its 2018 annual report, but that expense ratio still rose to 2.46% by the 2020 report. Part of that fee is the cost of shorting, which is not something collected by the fund company. With those costs removed, it is still a rather expensive 1.63%.
A passel of Fidelity equity funds has substantially raised fees of late: The expense ratios of Fidelity Capital Appreciation FDCAX, Fidelity Diversified International FDIVX, Fidelity International Discovery FIGRX, Fidelity Low-Priced Stock FLPSX, Fidelity Mid-Cap Stock FMCSX, and Fidelity Stock Selector Small Cap FDSCX rose anywhere from 14 to 36 basis points from their 2018 annual reports to their 2020 reports. In each case, these increases owed largely or completely to strong recent performance: Each fund adjusts its management fee annually based on its rolling three-year performance relative to its prospectus benchmark. Investors will thus pay a higher fee, at least in the short term, based on past performance. But if performance slips again, they'll pay less if they hang on to the fund.