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Fund Times

Fund Times: Fidelity Fee Cuts Made Permanent

Plus news on Putnam, SEC rules, and more.

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Fidelity made fee cuts permanent on five index funds this week.

Fidelity first slashed the fees on five of its index funds on Aug. 31, 2004. However, it was only a voluntary measure then, meaning that Fidelity could have rescinded the cuts at any time. As of March 1, 2005 however, the fee cuts are now contractual, meaning they can be raised only through a shareholder proxy. This would give investors the chance to veto any proposed increases, decreasing the likelihood of large increases in the future.

The five affected funds are  Fidelity Spartan 500 Index (FSMKX) and  Fidelity Spartan U.S. Equity Index (FUSEX), both of which track the S&P 500;  Fidelity Spartan Total Market Index (FSTMX), which tracks the Wilshire 5000;  Fidelity Spartan Extended Market Index (FSEMX), which tracks the Wilshire 4500 Completion Index; and  Fidelity Spartan International Index (FSIIX), which tracks the MSCI EAFE Index.

Fidelity Spartan International's situation is a bit different from the others'. The expense ratio used to be 0.47%, and it's now voluntarily capped at 0.10%. However, the expense ratio is only contractually capped at 0.20%. Even at the higher fee, it's still the least expensive foreign large-blend mutual fund or exchange-traded fund available to individual investors. 

If you invest in a high-cost index fund and are considering switching to any of the aforementioned funds, you should carefully evaluate your circumstances, including any potential tax consequences, before switching.

Putnam to Pay Shareholders More Than $153 Million
Putnam announced March 3 that it will pay $153.5 million to shareholders harmed by the firm’s market-timing activities. This amount was confirmed by an independent consultant. (The firm’s settlement with the Securities and Exchange Commission and the Commonwealth of Massachusetts required that an independent consultant be appointed to determine the amount of reimbursement to be paid to shareholders and to and funds affected by Putnam’s abusive trading activities. The charges against Putnam alleged that the firm’s own employees engaged in market-timing and short-term trading activity, and the Massachusetts Securities Division also alleged that Putnam allowed abusive trading by certain participants of 401(k) plans administered by Putnam.

Here is how the numbers break down: Back in April 2004, Putnam agreed to pay a total of $110 million in fines and disgorgement of ill-gotten gains to complete settlements of state and federal market-timing charges. Of this total, $70 million was to be set aside to reimburse shareholders. On top of this amount, the consultant estimated that $83.5 million in additional compensation should be paid. (The costs of improper employee trading were estimated to be $3.8 million; the costs of improper 401(k) trading were figured to be $45 million; consequential damages, which are essentially additional transaction costs in the fund portfolios caused by investor redemptions, were estimated to be $45.6 million; and finally $14.1 million was estimated to be the present-value adjustment to recapture the interest on the funds lost. All of this totals $108.5 million.) The portion of the original SEC settlement over and above the loss amount was $45 million, which brings the total to $153.5 million that will be paid to shareholders.

Adding in the $40 million penalty Putnam paid to the Commonwealth of Massachusetts, which will not be distributed to shareholders, brings the entire amount of reimbursements plus penalties as a result of abusive trading to $193.5 million. This amount does not include costs of legal fees or costs and fees the independent consultant incurred while compiling his study.

Putnam said that the plan for distributing the reimbursements to shareholders is currently being developed by the independent consultant, and is subject to approval by the trustees and regulators. The firm said all distributions will likely be paid by the end of summer 2005.

Head of Large-Cap Growth Investing Leaves Putnam
Brian O'Toole, head of large-cap growth investing at Putnam, is leaving the firm, according to Putnam. O’Toole joined Putnam in June 2002; formerly, he was Citigroup Asset Management's director of U.S. growth equities. At Putnam, O'Toole was the lead manager on  Putnam Voyager (PVOYX), and he comanaged  Putnam Growth Opportunities (POGAX) and  Putnam New Opportunities (PNOPX). O’Toole was the last major hire on the investment side before the current CEO Ed Haldeman replaced Larry Lasser, the firm’s former CEO.

Putnam said O'Toole will be replaced on Putnam Voyager by Kelly Morgan, the firm's head of Global Equity Research who assists with portfolio construction at Putnam’s analyst-run  Putnam Research (PNRAX). She will be joined by Rob Ginsberg, who previously ran Delaware Value (DDVAX).

Putnam also said that David Santos, who was O’Toole’s comanager on Voyager, also left. In addition to Voyager, he comanaged  Putnam Discovery Growth (PVIIX) and the Growth Opportunities fund. Santos had been with Putnam since 1986.

SEC OKs Voluntary Market-Timing Charges
The Securities and Exchange Commission voted Thursday to adopt a new rule allowing, but not requiring, mutual funds to charge redemption fees of no more than 2% on shares of funds held for less than seven days. The rule is set to take effect in 18 months. The fees would be retained by the funds, and the idea behind them is to try to deter investors from rapidly trading mutual funds and to compensate long-term shareholders for some of the costs associated with rapid trading.

In its proposal last February, the SEC had originally planned to adopt a rule that would require most mutual funds to impose mandatory 2% redemption fees on funds sold within five days of purchase.

Money market funds, exchange-traded funds, and funds that welcome market-timers per prospectus rules are exempt from the rule.

Etc.
Ariel Premier Growth liquidated as of Jan. 14, according to an SEC filing. The firm's advisor closed up shop, leaving Ariel with few options.

According to an SEC filing,  Dreyfus Founders Discovery (FDISX) reopened to new investors as of March 1.

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