Funds That Clear the High-Cost Hurdle
Despite high fees, these names still manage to beat their peers.
If you're a regular reader of Morningstar.com, you're well-aware that our analysts generally favor a low-cost approach to investing. High fees and other investing costs not only eat away at returns over time, they provide one of the strongest indicators of long-term fund performance, with low-fee funds generally outperforming high-fee funds regardless of asset class and time period.
But even though low fees are a path to higher returns, occasionally a fund merits consideration despite charging more than its peers. For example, a fund might charge more than its peers because of its smaller size, meaning that it lacks the economies of scale of a larger fund but it might be more nimble. And for investors who favor actively managed funds over index funds, paying a higher fee comes with the territory in part because of the added cost of paying analysts and managers to do the research. It's up to the individual investor to decide whether such considerations merit paying extra for a fund when cheaper alternatives exist.
Considering the drag that high fees have on returns--and bearing in mind that fees are taken into account in calculating a fund's total return--fund managers who achieve above-average results while charging above-average fees deserve notice.
To identify some of these high-fee outperformers, we used Morningstar's Premium Fund Screener and searched for stock funds with above-average expense ratios and five-year returns that are above their category averages. To narrow down our list to funds our analyst team thinks are worthy of your consideration, we stuck with those rated with Morningstar Analyst Ratings of Bronze or better. We also eliminated institutional and load funds as well as those closed to new investors. Premium users can see the full screen here. Below is a sampling.
Wasatch International Growth (WAIGX) (
)Some investors might look at this fund's 1.66% expense ratio and start running in the opposite direction. But despite slightly above-average fees for its foreign small/mid-growth category, this small fund ($350 million in assets) deserves consideration for those looking for a name run by an experienced management team from a company with a strong reputation in small caps. As of February, the fund had delivered average annual returns of 4.5% since manager Roger Edgley took over in early 2006, beating its peers by 2.3 points during that time span. The fund focuses on quality growth stocks within its investment universe, but it's not for the squeamish. In addition to its focus on smaller companies, it holds more than 40% of its portfolio in emerging markets--nearly triple the category average--with India and Indonesia each representing about 8%. Although not suitable as a core foreign holding, this fund can provide diversification in a supporting role.
Weitz Partners Value (WPVLX) (
)This fund charges 1.20% in fees versus 0.80% for the large blend category, but it has been a good long-term performer, with top-quartile returns in the trailing one-, three-, five-, and 10-year periods despite some long dry spells. The fund takes a multicap, contrarian approach, investing in financially distressed companies its management team expects will recover. The fund has an overweighting in consumer cyclicals, at nearly 19% of the portfolio, which is double the category average, and currently holds more than 20% of assets in cash. Slightly more than half the portfolio is in large caps, with top holdings in its concentrated portfolio including Wells Fargo (WFC), Berkshire Hathaway (BRK.A) (BRK.B), and Aon (AON), each at around 4%. Lead manager Wally Weitz has been running the fund since its inception in 1983. At $700 million, its asset base is on the small side.
Yacktman Focused (YAFFX) (
)Consumer stocks dominate this concentrated large-value fund's portfolio, making up nearly 60% of holdings, including blue-chip names such as Procter & Gamble (PG) and Pepsi (PEP), each at about 10% of assets. Fund managers Donald Yacktman, Stephen Yacktman, and Jason Subotky seek out companies with strong cash flows and low debt, and that are selling at discounts to what the managers think they're worth. About 15% of assets were in cash as of the end of March. Other sector bets here include health care at 16% of invested assets and technology at 15%. The fund's 1.25% expense ratio is a tick higher than the category average, but the fund has posted stellar short- and long-term returns, including ranking in the top 1% of large-value funds for the trailing five-, 10-, and 15-year periods.
Portfolio information as of March 31.
Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.