The Alger 25 fund, which had grown to less than $25 million despite very strong performance in the active strategy, cut the funds current expense ratio by 20 basis point on Nov. 1.
The fund, which is up more than 29% so far this year, and gained more than 33% last year, was launched with a sliding expense ratio that ranged from 30 basis points to as high as 80 basis points depending on the 12-month trailing performance relative to the S&P 500 Index.
The S&P is up 2.5% this year and gained 28.9% last year, so the indicators suggest the Alger funds adjustable fee was headed for another bump up at year end.
While its rare to see a high-performing fund cut its expense ratio by more than 30%, especially so close to the crucial three-year anniversary, Alger chief distribution officer Jim Tambone said the decision is more about the next product than the success of the current one.
Its not any negative judgment about fulcrum fees because on a personal level I like them, but in February well be launching a semitransparent ETF and they cant have fulcrum fees, he said. That left us with the dilemma of having similar strategies, one with fixed fee and one with fulcrum fee.
In addition to the Alger 25 Fund, the asset manager also plans to remove the fulcrum fee from the Alger 35 Fund (ATVVX). Alger 35, which is up more than 41% this year after gaining 30% last year, has grown to less than $15 million and will be stacking up against a mid-cap semitransparent ETF slated for launch early next year.
Alger, which has $37 billion under management across 33 funds, will be using the semitransparent ETF wrapper for its debut into the ETF space.
Todd Rosenbluth, director of mutual fund and ETF research at CRFA, acknowledged the benefits of fulcrum fees in giving investors an incentive to stick with actively-managed funds but said theres no avoiding the trend toward lower fees.
Active funds like this tend to charge 1% or higher, and 45 basis points is in line with what were seeing from active ETFs, he said. I think the fulcrum fee has good intentions to put the asset manager on the same side as investors, but a funds expense ratio that gyrates can be harder for an adviser to educate their clients about.
That might explain why the two strong-performing Alger funds have such low asset levels. That and the fact neither fund has reached its three-year anniversary yet.
Mark Struthers, founder of Sona Wealth, said fulcrum fees appeal to him at least in theory.
I dont currently (allocated to funds with fulcrum fees), but I would if it was the right fit in the portfolio and the client was made aware and understood the risks and costs, he said. Within moderation, this type of fee schedule does appeal to me as long as the client is on board.