The shareholder who is suing Fidelity Investments, contending that the mutual fund industry has not passed along to investors the reduced costs which economies of scale bring, owns funds whose expenses have decreased as a percentage of assets, Fidelity says.
Fidelity last week asked a judge to dismiss the case which fund shareholder Richard T. Krantz filed in September against Fidelity's parent, FMR Corp., and five of its subsidiaries. In court papers filed Jan. 11 in US District Court in Boston, Fidelity found fault for several reasons with Krantz's allegations that Fidelity funds' directors are not independent and have approved "disproportionately large" fees for Fidelity.
A crucial point Fidelity made was that the two funds Krantz owns, Fidelity Value and Fidelity Equity Income II, have seen expenses as a percentage of assets decline "steadily and substantially as assets under management grew" since 1993.
The Value Fund expenses decreased from 1.11 percent of average net assets in fiscal 1993 to .66 percent in fiscal 1997, said Fidelity. Equity Income II's expenses decreased from .88 percent in 93 to .68 percent in 1997, Fidelity said.
Fidelity also argued that Krantz can only complain about fees in funds he owns and not other funds in the Fidelity complex. Krantz is seeking damages equal to the amount of fees which all Fidelity's funds paid Fidelity from September, 1997 to September, 1998.
Krantz's lawyer, Joel Feffer of Wechsler Harwood Halebian & Feffer in New York, declined to comment.
In September, Krantz sued Fidelity alleging, among other things, that the directors of Fidelity's funds had lost their independence from the fund adviser because they received more than $200,000 per year for serving on the boards of more than 200 funds. The Investment Company Act, the key federal law which governs mutual funds, requires that at least 40 percent of the directors of a mutual fund be independent of the fund adviser.
The Fidelity case is similar to others which have been filed against T. Rowe Price Associates, BlackRock Financial Management, BEA Associates and Prudential. In each instance, the plaintiffs are challenging the independence of fund directors because of the fees they receive. All of the defendants in the cases, which are pending, deny the allegations.
In the Fidelity case, Krantz said the firm's alleged "fee gouging ... has been especially dramatic" and has boosted Fidelity's revenues. While assets in Fidelity funds grew from $35.8 billion in 1985 to $388.6 billion in 1995, total revenue for Fidelity rose from 1.085 percent of assets under management to 1.146 percent, or $4.3 billion, during the same period, Krantz alleged.
Fidelity, in its response, attacked that allegation. Total revenue figures represent the proceeds of Fidelity business unrelated to mutual fund management, Fidelity said. Operations such as Fidelity's venture capital and broker-dealer business also contributed to revenue.
Whatever the outcome of Fidelity's motion to dismiss, the debate over mutual fund fees and economies of scale in the industry will certainly continue. In November, the Investment Company Institute published a study which contended that the total cost of equity mutual fund ownership for shareholders has declined during the past 18 years. In a report to Congress in September, Lipper contended that economies of scale are available only on a fund-by-fund basis and not necessarily company-wide or industry-wide.
Fidelity also argued in its response to Krantz's suit that directors do not lose their independence by serving on more than one fund board in the same complex. The fact that the directors receive more than $200,000 does not destroy their independence because directors set their own salary, only can be removed by the vote of other independent directors and are not employees of Fidelity, the company said.
Krantz is expected to file a reply to the motion to dismiss in a few weeks.