Are high-fee funds sometimes justified? Yes, it seems that they are, according to the Wall Street Journal
. The source of the surprising position that higher fee funds are sometimes worth it are financial advisors, including Louis Stanasolovich (he adds that the average high expense ratio fund is bad for investors).
So which funds justify a higher fee?
Stanasolovich points to the Wasatch Micro Cap Fund as "one of a very few [funds] we'd pay up for." That fund has a 224 basis point expense ratio, but boasts performance in the top 5 percent of its peers.
Criticism for funds not being worth the fees is provided by Morningstar. The funds targeted for criticism by the Chicago-based fund tracker are Kaufmann Fund and Alger's Spectra Fund.
The fund rater contends in a written report that the 195 basis point expense ratio carried by Federated Kaufmann Fund are an "outrageously high price tag" for a mid-cap growth fund. The WSJ adds that Federated Investors will drop the asset management fee to 128 basis points from ___ when the fund's fiscal year ends at the end of October.
The Fred Alger Spectra Fund carries a 150 basis point fee, but only ranks in the bottom twentieth percentile of large-growth funds. Its total expense ration is 203 basis points.
The WSJ explains that there are "legitimate reasons" for higher expense ratios in "certain types of funds." One reason: managers who know they are going to close a fund while it is relatively small need to charge a higher fee so they earn a profit. Those funds tend to invest in thinly-traded or emerging markets stocks, the paper implies.
It also points to funds that mimic hedge funds by selling stocks short. A case in point is the $73 million Boston Partners Long/Short Equity Fund, which carries a 225 basis point expense ratio (207 of which cover management fees).
Another is the $22 million Alpha Hedged Strategies Fund. That fund charges a 250 basis point management fee. Despite the "outrageous" sounding fee, Stanasolovich told the paper he is probably going to recommend the fund to some clients as the fee is "not bad in the hedge-fund world."
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