The letters came flooding in last week when Wasatch Advisors announced plans to reopen some of its funds to shareholders.
Alas, the move created a lot of confusion. Here are two common Wasatch questions, plus one other question where consumers may be surprised by the impact of a new rule.
Q: Wasatch is opening four funds at the end of January. Which one should I buy, or should I buy all four? Jim in Richmond, Va.
A: Wasatch is known for running aggressive, successful funds, and then shutting them to both new and existing investors once assets reach a comfortable size. It’s a trait that, coupled with solid performance, has earned the firm a lot of respect from industry watchers.
As for buying all four funds: No way.
Not only would you wind up with a portfolio that is too dependent on one investment style, subjecting your portfolio to heightened “managerial risk,” but just one fund, Wasatch Ultra Growth, will re-open to all investors Wednesday. The other funds – Wasatch Core Growth, Wasatch Small Cap Value and Wasatch Small Cap Growth – are opening only to existing shareholders and registered investment advisers. If you don’t already have an account, you would need to buy the funds through a financial adviser.
That said, the real question is whether to buy Wasatch Ultra Growth, which has a superior long-term record, but a miserable last three years.
“For someone on the outside looking in and wanting a Wasatch fund because they historically have been good small-cap managers, go ahead,” says Christine Benz, director of mutual fund analysis at Morningstar Inc. “But if you have not been envious, or have not really wanted to own a Wasatch fund, don’t rush. This is a time when a lot of investors are rebalancing away from small caps, and it’s not Wasatch’s best fund.”
Q: If closing Wasatch Small-Cap Value was good for me, is re-opening it bad for me? Henry in Idyllwild, Calif.
A: Wasatch chairman Sam Stewart said the firm was re-opening the funds because additional assets would help the funds more easily “achieve their ongoing investment objectives,” while also satisfying demand from brokers and shareholders.
Given the fund’s track record, you can’t assume this is an asset grab, which would be bad. And don’t expect the funds to stay open for long.
That said, one plus to existing shareholders is that they can invest more. Set up automatic monthly deposits, and they’ll continue even if the funds close again.
Q: We had our annual meeting with our financial planner and he said something about one of our funds doubling its expense ratio, but how it’s all on paper. I don’t understand. Betty in Albuquerque.
A: Obviously, you own a fund-of-funds – a mutual fund that invests in other funds, rather than directly buying stocks or bonds – because that’s the only type of fund where this is happening right now.
Until this year, a fund-of-funds quoted its expense ratio by saying only what it charged for its management services. Underlying management costs – what your fund pays to the funds it invests in – weren’t part of the expense ratio.
The problem is with independent funds, many of them small, boutique issues with high costs for an all-in-one, asset-allocation strategy; adding underlying fees to top-line costs will give some of these funds an expense ratio of about 4 percent.
Of course, that’s what their shareholders paid last year, they just may not have understood it. If the re-stated expense ratio on a fund of funds is high enough to make you uncomfortable, you’re overdue for a change.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
