UPDATED | Lawsuit Challenges Harbor Capital on Subadvisor Fees
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Wednesday, February 12, 2014

UPDATED | Lawsuit Challenges Harbor Capital on Subadvisor Fees

A mutual fund shareholder lawsuit alleges that Harbor Capital Advisors takes too big a slice of the fees related to the management of the Harbor International Fund, which is subadvised by Northern Cross.

The suit, filed in the U.S. District Court for the Norther District of Illinois by Harbor International Fund shareholder Terrence Zehrer, alleges that fees charged by Harbor Capital Advisors are "improper and excessive."
"To start, defendant Harbor Capital delegates almost all of its investment management duties to its sub-adviser Northern Cross, LLC ("Northern Cross"). Despite this fact, defendant Harbor Capital retains a substantial portion in fees that it charges Harbor International Fund," according to the complaint.

The suit is titled Terrence Zehrer vs. Harbor Capital Advisors, Inc., Case number: 1:14-cv-00789.

According to the complaint, the Harbor International Fund paid Harbor Capital more than $225 million in investment management fees in 2012. "Of that sum, defendant Harbor Capital paid Northern Cross just under $125 million for sub-advisory services, retaining approximately $100.5 million for itself, despite doing minimal, if any, work," according to the complaint.

The reason, according to the complaint, "Harbor Capital's fee schedule is not designed for Harbor International Fund and its security holders to take advantage of the savings arising from economies of scale. An accepted precept in the mutual fund industry is that it is not harder to manage a fund simply because it is bigger. Therefore, in order to prevent outsized fees, the percentage of assets under management that advisers charge as fees must decrease as the assets grow. Defendant Harbor Capital has not followed this rule. "

The court document states that the fund paid Harbor Capital 75 bps for the first $12 billion and 65 bps for all assets above that. According to the complaint, the fund had $48 billion AUM of as of October 31, 2013.

A spokesperson for Harbor has this response to the lawsuit: "Harbor Capital Advisors strongly disputes the claims and will vigorously defend the matter."

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