Image Credit: Christophe Vorlet
By Jason Zweig | June 5, 2015 9:40 p.m. ET
Talk to any money-management executive for more than two minutes and you will get an earful about how impatient investors are. And it is true: Individuals and institutions alike chase performance in good times and bail out in bad times.
According to the Investment Company Institute, a trade group, investors large and small hold stock mutual funds for four years at a time on average; bond funds, less than three. Those holding periods are about a year shorter than they were a decade ago, although fund investors rarely have held on for much longer.
One possible way to encourage greater patience: loyalty points like those common in other industries. Your supermarket and drugstore and bank and gas station offer you points or loyalty discounts. Even airlines—which shoehorn you into a cramped seat and feed you little bags of stale peanuts—give frequent-flier miles. Yet most money managers do almost nothing to show their appreciation for investors’ loyalty. Is it any wonder that people treat funds as interchangeable commodities?
Mind you, it isn’t easy to measure how much programs like these encourage greater loyalty among customers. But at long last, a few investment firms are trying to find out whether they can work.
In a blog post for the CFA Institute earlier this month, Ted Seides, president of Protégé Partners, a firm in New York that oversees $2 billion in portfolios of hedge funds run by other managers, called for hedge funds to offer “loyalty rewards,” or management fees that would decline steadily for investors who stayed put for years on end. A hedge fund charging a 1.5% annual management fee (alongside a 15% or 20% share of investment returns) might reduce that to 1.3% for a client who held continually for five years, 0.8% after 10 years and so on.
“It’s unbelievable” that so few investors have demanded that money managers offer such arrangements, Mr. Seides says. “It’s kind of crazy.”
David Salem, managing partner of Windhorse Capital Management, a Boston-based firm that runs investment partnerships with about $300 million in total assets, already has introduced a similar approach. One of his firm’s funds, Windhorse Ascent, which seeks to invest in a variety of assets on behalf of wealthy clients with long time horizons, charges 0.8% in annual management fees for investors who commit to hold for at least three years, 0.6% for those who stay put for five years and 0.4% for those who hang on for at least seven.
“The more patient your capital is, the longer-term your time horizon is, the better you will do,” Mr. Salem says. “That may be the only truism of investing, and we’d like everybody to be in that long-term mind-set.”
In 2000, fund giant Vanguard Group introduced what it calls its Admiral class of shares as a way of rewarding loyal investors. Shareholders who held $150,000 for at least three years or $50,000 for at least 10 years were bumped up into the Admiral class by Vanguard. That gave them an immediate reward of annual fees that were as much as one-third lower than normal.
Today, $1.1 trillion, or fully 36% of Vanguard’s total assets, is in Admiral shares. As the firm’s assets have grown, the Admiral requirements have fallen: Anyone with at least $10,000 in an index fund or $50,000 in an actively managed fund qualifies, regardless of tenure. Fidelity Investments also offers shares with lower expenses to investors who keep a minimum of $10,000 in a fund.
You might think many other mutual-fund companies would have followed suit. But Admiral never aroused any “chatter or controversy or envy or emulation,” says a Vanguard executive who was involved in the launch. Several fund-industry experts say they aren’t aware of other firms that have done anything similar.
Mr. Seides of Protégé Partners says he already has heard from several hedge-fund managers interested in adopting the idea of loyalty shares. No mutual-fund company has contacted him so far, he says.
Since the 1990s, mutual funds have offered a brimming alphabet goulash of ways to add more fees for certain kinds of investors: A shares charging upfront commissions, B shares charging back-end commissions and C shares charging higher annual fees, along with D shares, E shares, F shares, H shares, I shares, IR shares, K shares, L shares, M shares, N shares, O shares, P shares, Q shares, R shares, RX shares, S shares, T shares, W shares, X shares, Y shares and Z shares.
But almost no one, it seems, offered shares with discounted fees for loyal investors.
And, while many financial advisers reduce their annual fees for investors with millions of dollars, very few—if any—offer lower fees for clients who stay put for years on end, says Eliza De Pardo, director of consulting at FA Insight, a financial research firm in Tacoma, Wash.
When will mutual funds and financial advisers finally wake up to the fact that some hedge funds—notwithstanding a reputation for high fees—are treating loyal investors better than they are?
Source: The Wall Street Journal