By TIM PARADIS
April 17, 2007
NEW YORK (AP) — Mutual fund investors looking for money-back guarantees on Wall Street have
often been told to keep walking.
Often, investors could simply grumble or try to shrug off the vagaries of investing but ultimately demand
little of mutual fund managers. Now, a small but growing number of mutual fund families are using fees
as a way to compensate shareholders for lackluster performance and even reward fund managers
for strong returns.
Fees at eight of Dunham & Associates' 10 funds are tied to performance. So, for example, fees at a
fixed-income fund with an expense ratio of 0.3 percent might rise to 0.60 percent if the fund outperformed its
benchmark by a substantial amount. On the other hand, if it underperformed by a significant amount, the
fund would waive the fees.
"When the investors are experiencing euphoria, they don't mind and in fact welcome the opportunity to
reward their advisers. When the investors are feeling pain and abused ... they're annoyed about paying fees
for sub-par results," said Jeffrey Dunham, principal at Dunham, whose funds' combined assets are worth
about $400 million. "It creates a partnership where one does not exist today."
He concedes what while investors might not save money overall with performance-based fees, they will feel
relieved to pay lower fees should returns falter.
"It isn't about the absolute price. It's about price relative to value."
Not all funds that aim to assuage customer concerns over lackluster performance regularly reduce fees.
Charles Schwab & Co. last month expanded the number of its funds that refund the previous quarter's
management fee to dissatisfied investors. Sixteen of the company's funds now operate under this model.
"We think it's a fair proposition for the clients and we are targeting clients who may not be
used to investing in managed portfolios," said Gregory Maged, vice president for advised solutions
at Schwab Investors Services.
Schwab will consider adding the "money-back" guarantee to other funds as it determines
how well it works with the first batch of funds. Maged said the company isn't worried shareholders will
abuse the offer because the company would work with them to mollify their concerns, perhaps placing them
in another fund. To date, only one customer has requested a refund, Maged said.
While Fidelity Investments has since the 1970s adjusted fees on some domestic and international
equities funds based on performance, the company's board in February authorized the adoption of such
fee structures for 19 additional funds. If approved by the shareholders of those funds, it would give
Fidelity 68 funds with performance-based fees.
"We have found it make sense for shareholders because it more closely aligns our economic interests
with theirs," Fidelity spokesman Vincent Loporchio said.
Fidelity evaluates performance against a benchmark over a rolling 36-month period in order to focus on
long-term performance. The maximum adjustment to the fees is plus or minus 0.20 percent.
Laura Lutton, mutual fund analyst at investment research provider Morningstar Inc., hopes more funds
will begin adjusting fees to mirror performance.
"We're big fans of performance fees because the shareholders get a break when the fund isn't
delivering on performance. We view performance fees as a best-practice in the industry."
"This is a way fund boards can really score a goal for investors."
Used with permission of The Associated Press Copyright © 2007. All rights reserved.
* Please note that all 10 of Dunham Funds (not eight) have sub-advised compensation tied to
performance versus an established benchmark.
* Some Sub-Advisors may receive a minimum fee regardless of whether or not an established
performance benchmark is met or exceeded.
* The Dunham Funds do not offer money-back guarantees. Note that with regard to the expense ratio
referenced in this article, the example references a hypothetical management fee that is included
in the overall expense ratio. The total expense ratio also includes fees such as shareholder
servicing fees, underlying fund expenses and other expenses, as applicable. Carefully consider
the funds' investment objectives, risk factors, charges and expenses before investing. This and
other information can be found in the Fund prospectus, which may be obtained by calling us at
800-442-4358. Read the prospectus carefully before investing. Investing involves risks, including
possible loss of principal.
* As the Distributor/Advisor of the Dunham Funds, Dunham & Associates Investment Counsel receives
a separate fee.
The use of these opinions is no substitute for legal, accounting, investment and other professional services to suit your needs. This should not be construed as investment advice.