Fund boards are starting to show their teeth.
In its latest effort to dig itself out of the gaping hole left by a painful bear market and a series of trading improprieties, AIM Investments has slashed 12b-1 fees on the bulk of its mutual funds.
The Houston-based fund complex, a subsidiary of UK investment management firm Amvescap, wrote in a July 1 letter to shareholders, that, after a comprehensive review of fees, the board of trustees for the AIM Funds has approved a proposal to reduce all 12b-1 fees on its class A shares to 25 basis points, a move that brings them in line with the industry average. The markdown, effective immediately, is "permanent" and also extends to class A3 shares and the AIM Summit Fund.
Unrelenting Regulators
The fee cuts come amid unrelenting pressure from regulators and investor advocates for fund boards - often thought of as being rubber-stamps for management - to be more vigilant of shareholder interests and hold fund management accountable in the wake of pervasive scandal.
"With these fee reductions, we hope to continue delivering solutions for your investment goals at a lower cost," wrote CEO and President Mark Williamson and Bruce Crockett, chairman of the board for the AIM funds.
In addition, the company lowered expenses on several other funds, including the AIM Large-Cap Basic Value, AIM Large-Cap Growth and AIM Premier Equity funds, as well as investor share classes of the AIM Technology Fund. However, these fee cuts, while also effective July 1, will be in effect for at least the next 12 months, AIM said.
Originally drafted to defray the costs of marketing and advertising for mutual funds, Rule 12b-1 has morphed into a means for paying brokers that sell a company's funds, a practice that has drawn the ire of the Securities and Exchange Commission, NASD and state attorneys general.
Scandal Fallout
The move follows AIM's sweeping $15 million annual reduction of advisory fees in December 2004, a stipulation of its market-timing settlement with New York Attorney General Eliot Spitzer. All told, AIM and its now-defunct sister company Invesco paid $451.5 million in fines, fee cuts and restitution for allegedly allowing preferred customers to trade rapidly in and out of its mutual funds, violating its prospectuses and bilking long-term shareholders.
AIM and Invesco have also faced a number of class-action lawsuits alleging that the advisor breached its fiduciary duty by collecting excessive marketing, distribution and other advisory fees from the funds after the funds were closed to new investors, thereby reducing liquidity and performance.
But the scandal was not the fund manager's only problem. Having been predominantly a growth shop during the 1990's, AIM was hammered by the collapse of the technology sector and the prolonged bear market that ensued. As a result, its funds have been hemorrhaging assets at an alarming rate. In the period extending from January 2003 to May 2005, AIM (including Invesco) has lost $27.2 billion in assets, according to Financial Research Corp. of Boston (see chart, below). Since the scandal broke in September 2003, AIM's funds have suffered a massive $23.1 billion outflow.
When the Invesco funds were merged into the existing AIM funds, there was a disparity between their 12b-1 fees; Invesco funds charged 25 basis points, whereas AIM funds were banging their shareholders out for 35 basis points. This new move to reduce 12b-1 fees across the fund complex helps to better align prices across the board.
"This is going to make them more competitive," said Karen Papalois, a mutual fund analyst at Chicago-based fund researcher Morningstar. "Lower fees should shine through in their performance. This is something we are going to see more of in the industry, as funds look harder to compete, especially in a low-return environment."
Consistent with its efforts to improve performance and lower costs for shareholders, AIM has also made some changes to its breakpoint discount policy and folded eight of its most poorly performing funds into other AIM funds.
Hard Look at the Contract
"We were very aggressive with respect to the fees and the cost structure," Crockett told MME in an interview. "We just went through the contract renewal process and thought the 12b-1 fees were too high." The voluntary trimming of 12b-1 and other fees will result in annual savings of between $22 million and $23 million, on top of the cuts mandated by Spitzer's office, Crockett said.
If the performance is bad and fees are too high, funds will soon suffer net outflows, he said. "You don't make money if you're cashing out shareholders all the time."
While Crockett did not speak specifically to which expenses AIM is no longer asking shareholders to pay for, he noted, "Transactions costs are coming down." He cited transfer agent fees, processing fees and transaction costs associated with portfolio turnover as areas where AIM is finding efficiencies. He also said that electronic trading platforms and new trading software have helped bring costs down. He conceded, however, that brokers are still getting paid the going rate.
Despite the savings Crockett spelled out, some analysts aren't convinced. "Cutting back 10 basis points might help your performance in the rankings on the money market side, but on the equity side, it's not going to impact performance in any significant way," Keil said. "You have to cut fees more than that to really make a huge impact."
Scandal-Stigmatized
"For any of the firms that got spanked by Mr. Spitzer, I'm not sure their image can be fully recovered if it was irreparably damaged by a small fee decrease," said Jeff Keil, vice president, board analysis services, Lipper. Rather, the funds ensnared in the trading scandal need to put up some good performance results, demonstrate strong compliance and governance and exhibit good advertising practices to truly restore confidence to prior levels, he said.
Morningstar's Papalois predicts that the firms tainted by the fund scandal will increasingly move to lower expenses across their lineup of funds. Columbia Funds, acquired by Bank of America in its merger with FleetBoston, is another scandal-stigmatized fund family that has recently pared its 12b-1 fees. A Columbia spokesman had not returned phone calls seeking comment at press time.
Elsewhere, Connecticut insurer The Hartford, untouched by the whole mutual fund imbroglio but subpoenaed by Spitzer's office in regards to variable annuity sales, lowered the boom in November 2004. The company scaled back 12b-1 fees on all of its class A retail mutual funds by five basis points.
"Over the past year, The Hartford Mutual Funds has been proactive in helping to achieve our goal of delivering superior returns and value to our shareholders," said Thomasin Mullen, a company spokeswoman.
While a handful of fund shops have chopped their 12b-1 fees, it is not yet widespread across the industry. "This is not a trend," Keil said. "They are sort of anomaly in the greater 12b-1 world."
In fact, some firms are actually adding 12b-1 fees to their lineup of mutual funds. Low-cost provider TIAA-CREF is proposing fee hikes for some of its funds (see "News Flash," page three), a move that, if approved by shareholders, would nearly quadruple annual costs in some cases. But only four of the retirement savings giant's 23 actively managed institutional funds will be impacted, representing less than 2% of its total $325 billion in assets.
The Ax at the Big Three'
Meanwhile, the new "Big Three," Fidelity, Vanguard and American Funds, recently have taken an ax to their fee tables as well.
But that can be attributed more to an aggressive business strategy and healthy competition (or price war depending on who you ask), rather than an effort to stem outflows.
Industrywide, there have been fee cuts at 844 funds between January 2004 and early March of this year, more than double the number of cuts in 2002 and 2003 combined, according to Lipper. However, a lot of those fee decreases are merely prospective, in other words, breakpoints added to asset levels that have yet to be achieved. They don't necessarily affect current shareholders, but they will affect future levels of assets. Having said that, it is difficult to quantify the prevailing fee trends because they are in a constant state of flux.
"[Ultimately,] fees are going to creep down, but I don't think they're going to come down in any monumental way," Keil said.
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