Watch Out for Rising Fees at These Funds

Investment fees remain one of the most reliable predictors of future success, so it’s generally a good idea to take a closer look when fund fees rise.

Within the Morningstar 500—a collection of the industry’s best and most notable funds from the Morningstar FundInvestor newsletter—three funds with Morningstar Medalist Ratings of Bronze saw their expenses increase by 15 basis points or more from 2023 to 2024.

In the case of Janus Henderson Small Cap Value JSCVX, it was considerably more, as expenses rose 40 basis points to 1.22% from 0.82%. The increase came from the fund’s performance-based fee, which adjusts up or down based on its three-year performance relative to the index. Small Cap Value is benefiting from losing less than the Russell 2000 Value Index in 2022 when its 9.9% loss was less severe than the index’s 14.5% drop. Managers Justin Tugman and Craig Kempler’s search for resilient, competitively advantaged businesses tends to do well in down markets. While the fund has predictably fallen behind in the subsequent market rallies, its three-year annualized gain through November 2024 of 8.0% remained comfortably ahead of the index’s 6.4%.

Performance fees come with good and bad features. True, they help managers have more skin in the game. However, new investors who may have been attracted to the strategy end up paying for past performance results, and they now also face a higher price hurdle. Janus Henderson Small Cap Value’s 1.22% expense ratio ranks it among the top third of the most expensive small-cap no-load funds; its 0.82% expense ratio would have ranked it among some of the least expensive small-cap funds.

Janus Henderson Mid Cap Value JMCVX presents a similar story as its small-cap value cousin. Its expense ratio increased to 0.89% in 2024 from 0.74% the year prior as a result of an upward performance adjustment from losing less than the Russell Midcap Value Index in 2022. Janus Henderson Small Cap Value’s Tugman joins Kevin Preloger on this fund’s manager roster, and they ply a similar investment process that looks for superior, durable businesses.

Janus Henderson Mid Cap Value’s 0.89% expense ratio still ranks in the cheaper half of mid-cap no-load funds, though its previous 0.74% expense ratio would have put it in the cheapest quartile of peer funds.

While the two Janus price increases bring some ambiguity in their benefits to investors, the fee increase for Alger Small Cap Focus AOFAX has less uncertainty. The fund’s expense ratio rose to 1.48% from 1.32%, largely from an increase to the fund’s “other expenses,” a catchall for various administrative fees that generally benefit from scale as fund assets increase. Conversely, these fees can go up as a percentage of net assets when assets drop.

Investors have been pulling money from the fund in recent years as manager Amy Zhang’s penchant for high-growth, sometimes high-priced companies has struggled. The fund has ranked at or near the bottom decile of small-growth funds in each calendar year since 2021, and its 13.7% gain in 2024 landed just in the bottom half of its peers.

Alger Small Cap Focus’ previous fee of 1.32% was among the most expensive third of small-cap front-load funds. The new fee creates an even higher hurdle.

This article first appeared in the January 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.