Hennessy versus Bogle in fund-fee spat

In letter to Wall Street Journal, he says the Vanguard founder should shift focus to the financial-reform law

Sep 13, 2010 @ 3:53 pm

By Jessica Toonkel

John Bogle should spend more time focusing on financial-services reform and less time pointing the finger at mutual fund managers if he wants to address rising fund costs, Neil Hennessy, president and chief executive of Hennessy Advisors Inc., wrote in a letter that appeared in today's The Wall Street Journal.

“Good fund managers often outperform low-cost index funds, and funds' performance is published net of fees, period,” Mr. Hennessy wrote. “I think that Mr. Bogle's time would be much better spent working on solutions to address the financial-regulatory-reform act, which will certainly increase costs to every single mutual fund shareholder.”

Mr. Hennessy's letter is in response to an Aug. 27 Wall Street Journal opinion piece written by Mr. Bogle, the founder and former chief executive of The Vanguard Group Inc., in which he cited a recent Morningstar Inc. study showing that fund expenses are an accurate predictor of a fund's performance.

In his piece, Mr. Bogle noted that fund costs rose to $42 billion from $50 million between 1960 and 1990 — an 800-fold increase — while equity fund assets grew to $5 trillion from $10 billion, a 500-fold jump.

“Conclusion: The huge economies of scale available in managing other people's money have largely been arrogated by fund managers to their own benefit, rather than to the benefit of fund shareholders,” he wrote.

Mr. Hennessy also blamed increased regulatory and distribution costs for the increase in fund expenses.

“For one of our typical funds, federal and state registration fees have increased 44%, legal fees have increased 73%, and audit fees have increased 30%,” he wrote.

Also, while no-transaction fee platforms didn't exist in the 1960s, today funds pay as much as 40 basis points to be on the platforms offered by the likes of The Charles Schwab Corp. and Fidelity Investments, Mr. Hennessy wrote.

His grievances are shared by many in the fund industry, said Don Phillips, a managing director at Morningstar.

“I think a lot of people would be afraid to do what Neil did and that is to out the distributors,” he said. “The asset managers are taking all the blame for high fund expenses, while the distributors are completely off the radar.”

Greg Gable and Alison Wertheim, representatives for Schwab, didn't respond to e-mails seeking comment.

Adam Banker, a Fidelity spokesman, said Fidelity believes the fees associated with its no-transaction fee platform, as well as the fees it charges to its brokerage clients, "are in line with our cost of service and guidance delivery to shareholders."

"You should note that we provide a wide variety of financial planning tools and services to our customers, virtually all of which are available at no additional cost to the customer," she said.

Mr. Hennessy and Mr. Bogle couldn't be reached by press time.

This debate about the role that distributors' play in mutual fund costs will only become more heated as the Securities and Exchange Commission solicits feedback on its 12(b)-1 fee reform proposal.

Although the proposal, which is up for comment until Nov. 5, would cap 12(b)-1 expenses, it doesn't help with disclosure or prevent fund companies from paying their distribution costs through other means, such as through their funds' management fees, Mr. Phillips said.

“In his argument, Neil is saying fees are higher partly because of what they have to pay to the NTF platforms. But since fund companies don't break out their expenses that way, no one can tell if he is right or wrong from the way this is disclosed today,” Mr. Phillips said.

“The owners of funds have the right to know how their money is being spent,” he said.

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