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Fund Spy

Four Funds with Falling Fees

These funds have bucked the trend and lowered expenses.

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Over the past six months, investors have had to endure a seemingly endless stream of bad news involving the mutual fund industry. Dozens of fund companies have been charged with malfeasance, some of it quite severe, and nearly all of it detrimental to shareholders. Trust has been badly eroded, and it may take years to be rebuilt.

On top of that, expenses for many funds have continued to creep upward, and sometimes it seems that only legal action can reverse this trend. Back in December, Alliance was forced to cut its fees 20% for at least five years as part of its settlement of market-timing charges, and MFS agreed to a similar fee reduction as part of its settlement earlier this month.

As a respite from all this negative press, we thought it would be refreshing to look at funds that have voluntarily lowered their expense ratios recently, either by cutting management fees or by taking advantage of larger asset bases to lower operating expenses. These offerings may not be as newsworthy as the scandal-tainted shops, but we think they deserve recognition for taking positive steps that benefit shareholders.

That's not to say that all funds whose expenses have come down deserve equal praise. For example,  Calamos Growth (CVGRX) had an excessive 2.00% expense ratio for many years, but it has lowered that number to 1.40% as the fund's asset base has skyrocketed from $29 million in 1999 to $6.6 billion at the end of 2003. That's a step in the right direction, but even the lowered expense ratio is still too high for a fund of this size. ( Fidelity Aggressive Growth (FDEGX), another mid-cap growth fund with a very similar asset base, charges only 0.55%, and other similar funds have expense ratios well below Calamos'.)

The following four funds, on the other hand, have become significantly cheaper over the past year or two. This is not an exhaustive list by any means, but it's a good sampling.

 Hussman Strategic Growth (HSGFX)
This fund was started in 2000 by John Hussman, a former professor of economics who makes heavy use of macroeconomic analysis and derivatives in the portfolio. As its assets ballooned from $14 million in 2000 to $443 million in 2002, the fund's expense ratio stayed at an excessively high 1.99%. Last year, however, that ratio was reduced to 1.45%, near the mid-cap blend category average. It's still not a cheap fund, but its expenses are at least reasonable now, and it's moving in the right direction.

 Mosaic Investors (MINVX)
This modestly sized fund ($131 million in net assets) has reduced its expense ratio in each of the past two years: from 1.15% in 2001, to 0.99% in 2002, to 0.88% in 2003. That puts it right around average among large-blend funds, and well below average for actively managed large-blend funds of comparable size. Mosaic's other funds have not lowered their expenses alongside this one, but their expenses were reasonable to start with. For example,  Mosaic Mid-Cap Fund  (GTSGX) has had an expense ratio of 1.25% for years, but that's well below the mid-cap blend average.

 Preferred International Value (PFIFX)
This fund has put up a generally solid record over the years, and its expenses have been okay, but not great. In July 2002, the fund's advisor agreed to waive 25 basis points (0.25%) of its management fee, resulting in an expense ratio of 1.03% for the fiscal year ended June 30, 2003. For the six months ended Dec. 31, 2003, that ratio was even lower, at 0.98%. This was already a reasonably priced fund, but now it's cheaper than three quarters of its peers in the foreign large-value category.

 TCW Galileo Total Return Bond  (TGLMX)
This bond fund's excellent long-term record was tarnished a bit in 2003 when a flood of mortgage prepayments early in the year caused it to fall far behind the intermediate-term bond category. Even so, the fund's advisor significantly reduced the operating expenses it charges shareholders, so that its expense ratio fell from 0.70% to 0.51% for the I (institutional) shares and from 1.00% to 0.82% for the N (investor) shares. The average intermediate-term bond fund charges 0.64% for institutional shares and 1.03% for N shares, so this fund is now cheaper than its most comparable peers.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.