Fidelity assets flowing to lower-cost trusts

Firm faces pressure to move retirement-plan clients to investment vehicles with dramatically lower fees

Aug 25, 2014 @ 11:39 am

By Trevor Hunnicutt

The biggest stock funds at Fidelity Investments, managed by luminaries such as William Danoff and Steven S. Wymer, are logging billions in withdrawals this year.

Unlike competitor Pacific Investment Management Co., the outflows seem to have little to do with lagging performance or tabloid coverage of management spats.

Indeed, their performance is strong. Mr. Wymer, for instance, is dominating 76% of his competitors this year, as of Aug. 22, and his Growth Company Fund (FDGRX) has a15-year track record that beats the S&P 500 benchmark by more than 250 basis points, according to Morningstar Inc.

Analysts and commentators have speculated that the outflows may suggest that Fidelity has fallen victim to a trend favoring passive investing that has contributed to the Vanguard Group's growing to nearly $3 trillion in assets for the first time. (That firm's mutual and exchange-traded funds have brought in $114 billion this year, more than three times the combined take of its top nine competitors.)

So what's going on?

It may be a trust issue. A collective investment trust, to be exact.

A majority of the nearly $9 billion in assets shown leaving Fidelity's stock funds this year remain with the firm in other investment vehicles, according to company spokesman Charles Keller.

While Mr. Keller declined to provide specifics, Fidelity communications reviewed by InvestmentNews show that $16.9 billion in retirement-plan assets in four top funds have moved or are committed to move to new trusts offered by the company.

The new structure — which faces less strenuous regulatory burdens, offers lower management costs and typically does away with revenue-sharing arrangements — is expected to save participating 401(k) plans money.

On the other hand, it puts a squeeze on the fees Fidelity can charge on the assets.

Fund companies across the industry are being pressed to lower fees in light of the increased availability of low-cost investment solutions and U.S. regulations requiring more transparency around fees in retirement-plan arrangements, according to analysts.

Actively managed funds have lost market share, controlling 64% of assets invested in U.S. stocks, down from 89% 15 years ago, according to Morningstar.

Michael Rawson, a Morningstar analyst, said that's putting pressure on active managers to reduce fees.

“One way for fund managers to retain assets without widely cutting expense ratios and sacrificing the profitability of existing fund assets may be to offer separate accounts at a lower price to institutional investors,” Mr. Rawson wrote in a report earlier this year.

“Fidelity is playing a little bit of catch-up, particularly given the scale of their retirement-services practice,” said Jon Chambers, a managing director of SageView Advisory Group. The registered investment adviser consults on $32 billion in assets and more than 560 retirement plans, including one that made the switch to the Fidelity trust format.

Mr. Chambers said his client is saving 34 basis points, a more than 44% drop, in annual management fees by converting from an institutional-priced version of the Growth Company Fund to the trust. That includes 20 basis points in revenue sharing that were paid by Fidelity's fund management division to its record-keeping division, the administrator for plans that made the switch.

“We have been managing and offering institutional investment products, including commingled pools, for many years,” Fidelity said in a statement. (Commingled pools is an alternate term for collective investment trusts.)

Despite increasing assets, fees paid to record keepers are declining and so is revenue sharing. In 2013. record-keeping fees fell to $80 per year for each participant, on average, compared with $92 in 2012, according to NEPC, an investment consultancy. More than a tenth of plans involve no form of revenue sharing at all. NEPC surveyed 95 plan sponsors representing 1 million plan participants and collected data from record keepers and other third parties.

Declining use of revenue sharing also could make it easier for plan sponsors to ensure that the fees paid are not excessive, advisers say.

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