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Yeah, I'm not quite certain what's going on here either. To me the issue went beyond AUM (I knew they had hired new staff), but to the Royce-esque biat and switch and skullduggery with benchmarks interpretation of performance and etc.
Ed S seems to have really had it in for Romick and FPA (questioning their ability to manage an asset base that large, and FPA's piety in tisk-tisking at other active managers while they let the free range chicken go off the range).
So, I can't really understand the motivation here. Isn't FPACX still the lion's share of FPA's (as a firm) AUM?
We still have Crescent on our watch list. For them to suggest that the MSCI ACWI Index is a good benchmark is impossible to swallow. FPACX's make-up is 37% cash, 43% U.S. stocks (mostly very large cap), 8% international stocks, 5% bonds, and 6% Other. The ACWI Index is basically 55% U.S. stocks and 43% international stocks. Where is the comparison? It is just too convenient.
On the question of Crescent's benchmark: their objective is to produce "equity-like" returns with reduced volatility over the course of a full market cycle, so it does make some sense to hold their FMC performance to some all-equity benchmark. In their estimation, MSCI World is likely to be a bit closer going forward than the S&P 500. In the short term and especially in down markets, it will certainly be a misleading comparison.
On the question of Ed's reservations: institutional culture and identity are fragile things, so when there are personnel transitions there are also likely to be culture transitions. Those are hard to get right. T Rowe pulls it off because the fund-level changes occur within the context of firm-level continuity. When you look at boutique managers, fund-level changes are often coincident with firm-level changes. Messrs. Ende and Geist have left. Mr. Rodriquez hasn't managed funds since 2009 or 2010 and is now 65. Mr. Atteberry, Mr. Rodriquez's successor at New Income, is 62. There's no evidence that either is leaving but, by the time you're in your 60s, empire-building is more typically in your past than in your future.
The effects of these generational changes can be profound and, occasionally, positive. The problem is that, as outsiders, we're pretty much clueless about a firm's internal decision-making and dynamics. One reason we haven't talked more about it is that we don't have more to say; that is, in principle concern is warranted but we have little to work with in individual instances. So, we try to stick with what we can document.
The Share Price segment laments the overabundance of share classes and their various associated fees. I'm going to try approaching this from the other end - what services do you get and how should they be paid for?
There are account servicing costs (statements, tax info, etc.) that are pretty constant per account. Funds can cover these costs by charging everyone the same rate (single share class, large investors subsidize small ones), or by creating a tiered structure (multiple share classes), so that each investor pays a somewhat similar dollar amount for the servicing portion. Phrased that way, cheaper Vanguard Admiral shares, or Selected Funds class D shares don't sound like a bad thing.
Where I think tiered accounts makes little sense is at the institutional level. Why should a $5M account pay double what a $200M account pays?
Transactions (buying/selling) have costs. It is cheap but not free to push paper around. Very cheap for funds, less so for brokerages. Thus they skim 40 basis points/year to make it seem you're not paying anything (NTF), or let you pay a la carte (TF). If a fund wants to give you a choice, it uses multiple share classes.
Advice has its costs, too. Pay via a wrap account (typically 1%/year), or at point of sale (front end load), or on the installment plan (skimming a percentage each year), or a la carte (fee only). Regardless, you will pay. Different methods, different share classes.
18 shares classes is absurd, but with choice of service and payments method comes choice of offerings (share classes).
Much of this is done to obfuscate, and that is not a "good thing". Even funds with single share classes may be doing this. Sequoia charges a flat 1% management fee and the management company pays for everything. In reality, you're paying, you just don't know how much (and how much is going to actually manage the fund) because it's all rolled up into a single number. But hey, it looks good, no 12b-1 fee.
I have the same issue with FPA. Crescent is marketed as a noload fund, but its expenses (for a balanced fund) are out of line with its siblings (formerly loaded funds). You're virtually paying a load or transaction fee or whatever you want to call it, you just don't know it because it's buried.
In contrast, look at a fund like American Century Ultra (TWCUX). As with Sequoia it rolls all the expenses into a single management fee. But it reduces that fee on institutional shares by 20 basis points. That gives you a reasonable idea of how much extra it costs to service retail customers.
Personally, I'm glad I can buy cheaper Admiral shares and pay TFs for cheaper shares that save me money in the long run. The commentary suggested that this was inequitable. I respectfully disagree. I see the issue as clarity not fairness.
Some mutual funds have done well in the 90's, but it's been just plain hard outperforming the Russell 2000 index ( IWM = ETF equiv. ). Maybe it's because they get too big, their management style stops working, or the market "complexion" has changed over the last 15 years ? Try plugging symbols mentioned in commentary here ( https://portfoliovisualizer.com/backtest-portfolio#analysisResults ) and select the Russell 2000 as "benchmark". I like to use 2002 and 2008 as dumb luck / Murphy;s law starting points ... even BRK-A loses out.
Hmm. I too assumed it must be plain hard, but when I just compared IWM with FLPSX and FCNTX over 1/3/5/10/15y, plus start 02 and 08, it sure looks like a piece of cake.
Comments
Ed S seems to have really had it in for Romick and FPA (questioning their ability to manage an asset base that large, and FPA's piety in tisk-tisking at other active managers while they let the free range chicken go off the range).
So, I can't really understand the motivation here. Isn't FPACX still the lion's share of FPA's (as a firm) AUM?
Plus, there's the fee issue as well.
On the question of Ed's reservations: institutional culture and identity are fragile things, so when there are personnel transitions there are also likely to be culture transitions. Those are hard to get right. T Rowe pulls it off because the fund-level changes occur within the context of firm-level continuity. When you look at boutique managers, fund-level changes are often coincident with firm-level changes. Messrs. Ende and Geist have left. Mr. Rodriquez hasn't managed funds since 2009 or 2010 and is now 65. Mr. Atteberry, Mr. Rodriquez's successor at New Income, is 62. There's no evidence that either is leaving but, by the time you're in your 60s, empire-building is more typically in your past than in your future.
The effects of these generational changes can be profound and, occasionally, positive. The problem is that, as outsiders, we're pretty much clueless about a firm's internal decision-making and dynamics. One reason we haven't talked more about it is that we don't have more to say; that is, in principle concern is warranted but we have little to work with in individual instances. So, we try to stick with what we can document.
For what that's worth,
David
There are account servicing costs (statements, tax info, etc.) that are pretty constant per account. Funds can cover these costs by charging everyone the same rate (single share class, large investors subsidize small ones), or by creating a tiered structure (multiple share classes), so that each investor pays a somewhat similar dollar amount for the servicing portion. Phrased that way, cheaper Vanguard Admiral shares, or Selected Funds class D shares don't sound like a bad thing.
Where I think tiered accounts makes little sense is at the institutional level. Why should a $5M account pay double what a $200M account pays?
Transactions (buying/selling) have costs. It is cheap but not free to push paper around. Very cheap for funds, less so for brokerages. Thus they skim 40 basis points/year to make it seem you're not paying anything (NTF), or let you pay a la carte (TF). If a fund wants to give you a choice, it uses multiple share classes.
Advice has its costs, too. Pay via a wrap account (typically 1%/year), or at point of sale (front end load), or on the installment plan (skimming a percentage each year), or a la carte (fee only). Regardless, you will pay. Different methods, different share classes.
18 shares classes is absurd, but with choice of service and payments method comes choice of offerings (share classes).
Much of this is done to obfuscate, and that is not a "good thing". Even funds with single share classes may be doing this. Sequoia charges a flat 1% management fee and the management company pays for everything. In reality, you're paying, you just don't know how much (and how much is going to actually manage the fund) because it's all rolled up into a single number. But hey, it looks good, no 12b-1 fee.
I have the same issue with FPA. Crescent is marketed as a noload fund, but its expenses (for a balanced fund) are out of line with its siblings (formerly loaded funds). You're virtually paying a load or transaction fee or whatever you want to call it, you just don't know it because it's buried.
In contrast, look at a fund like American Century Ultra (TWCUX). As with Sequoia it rolls all the expenses into a single management fee. But it reduces that fee on institutional shares by 20 basis points. That gives you a reasonable idea of how much extra it costs to service retail customers.
Personally, I'm glad I can buy cheaper Admiral shares and pay TFs for cheaper shares that save me money in the long run. The commentary suggested that this was inequitable. I respectfully disagree. I see the issue as clarity not fairness.
What sort of perverted standard is that??
even BRK-A loses out.
Cheers,
David