Katie Rushkewicz Reichart, CFA, is a senior analyst covering equity strategies on Morningstar’s manager research team.
The change directly challenges low-cost leaders Fidelity and Vanguard, fund families known for their cheap index funds. For example, the expense ratio of Schwab S&P 500 Index
, which dropped to 0.09% from 0.36%, is lower than the Vanguard 500 Index
(0.15% with a $3,000 minimum investment) and Fidelity Spartan 500 Index
(0.10% with a $10,000 minimum). Schwab also cut fees on several of its actively managed equity and bond funds, including Schwab Hedged Equity
and Schwab Premier Equity
. All changes took effect May 5, 2009.
Schwab's push to lower costs comes at a time when many funds are seeing their expense ratios rise as net assets have fallen, either as a result of market depreciation or shareholder redemptions. Vanguard, for instance, recently announced small increases in expense ratios
The firm is also likely targeting investors who might otherwise opt for cheap exchange-traded funds, like iShares S&P 500
, which charges the same 0.09% expense ratio as Schwab S&P 500 Index.
Reserve Primary Fund Faces Fraud Charges
The SEC has charged Bruce Bent and his son, Bruce Bent II, with fraud for misleading investors of the troubled Reserve Primary Fund. The money market fund came under intense pressure in September 2008 when Lehman Brothers collapsed and its $785 million stake in Lehman's commercial paper--about 1.2% of the fund's assets--became worthless. As concerned investors pulled money out of the fund, it ended up "breaking the buck," or dipping below a net asset value of $1 per share--long a hallmark of money-market funds. The suit claims that the fund's founder, Bruce Bent, and co-chief executive officer, Bruce Bent II, didn't adequately disclose information about the fund's position in Lehman Brothers and falsely assured investors that its net asset value wouldn't drop below $1. The fund's manager, Reserve Management Company, was also named in the suit.
This isn't the first lawsuit brought against the Bents and Reserve Management Co. There are nearly 30 outstanding cases pending from disgruntled investors, and the commonwealth of Massachusetts has also filed charges. While most of the fund's assets have been distributed to shareholders, about $3.5 billion has been retained for legal defense. The SEC's suit seeks to have all of the fund's remaining money returned to shareholders.
Marriages of Convenience
John Hancock has proposed merging the $31 million large-value fund John Hancock Classic Value II
into $51 million John Hancock3 Disciplined Value
. Classic Value II, subadvised by Pzena Investment Management, struggled in 2008 as some bad financial calls led to a loss of nearly 48% for the year. The fairly young fund, which launched in mid-2006, has also come under pressure following 20 consecutive months of outflows. Disciplined Value, subadvised by Robeco Boston Partners, fared better and has produced strong long-term results.
Mergers like these can be common among mutual funds, but choosing Disciplined Value to acquire Classic Value II is perplexing because the two funds have different subadvisors and strategies. It would have made more sense for Classic Value II to merge into John Hancock Classic Value
, which is also subadvised by Pzena and is run in a similar fashion.
John Hancock will foot the bill for transaction costs resulting from the merger. There's a chance that shareholders could get hit with capital gains taxes, but Classic Value II's large tax-loss carryforward could offset that. Shareholders of the pricey Classic Value II can look forward to lower costs if the merger goes through: Disciplined Value's 1.00% expense ratio is 33 basis points lower than Classic Value II's. Proxies were mailed to shareholders of Classic Value II, who can vote for or against the proposed merger by July 1, 2009.
Meanwhile, $41 million fund DWS Japan Equity
will merge into $13 million DWS International Value Opportunities
, pending shareholder approval. DWS Investments admitted in a public filing that it was too hard to attract investors to the narrowly focused Japan fund and that a declining asset base would likely prevent the firm from ever lowering fees. The merger is expected to be tax-free, but shareholders of the Japan fund could be hit with capital gains taxes if the portfolio's assets are sold. They'll get some relief if the merger goes through, though: The International fund's expense ratio is 17 basis points lower than the Japan fund's.
The bidding for Delaware Investments is said to be in full swing. Insurance company Lincoln National put the asset-management unit up for sale in April as it tries to work its way out of debt. A formal announcement regarding potential buyers of the $110 billion money manager has yet to be made.