Funds Made “Math Mistakes” on Performance Fees

Here’s an article to infuriate you: Funds Made Math Mistakes on Fees. What sort of errors did that mistake cause: Investors overpaid on the performance fees, the SEC and auditors found.

Math errors? Haven’t the flawed Pentiums been replaced about 15 years ago? Puh-leeze, this is just absurd. Why is it that whenever Wall Street makes a mistake, it is invariably is in their own favor, and never the investor’s? 

Just once, I would like to read an article that states a firm — whoops! gave investors too much money:

"It was our fault, we gave our investors a small windfall by mistake" said Quigley Feffenboozler, manager of the Blue Chip Value Preferred Balanced Equity Fund. "Since we made the mistake, we will just eat the losses. Its our Christmas resent to our fund holders."

Here’s an excerpt from the WSJ: 

Wsj_track04072005203325 "A method of calculating mutual-fund management fees that has been praised as a good deal for investors has recently gotten some fund companies in hot water with regulators for their faulty math.

At issue are funds that pay a higher portfolio-management fee when returns exceed a stock-market index or other benchmark — and pay less when returns lag behind.

These variable charges, known as performance fees, are common at hedge funds, the less-regulated investment pools for wealthy investors, where managers typically get paid extra if returns soar. But they are unusual in the world of mutual funds, where most managers collect a set percentage of fund assets no matter how investors do. Fewer than 3% of the nation’s stock and bond mutual funds — holding only 7.8% of the industry’s $7.5 trillion in assets — have such fees, according to researcher Lipper Inc. The numbers haven’t changed much in the past five years . . .

Under SEC rules, fund companies generally base performance fees on how returns stack up against a benchmark — rather than whether investors make or lose money. One exception is the closed-end Royce Value Trust, which years ago got SEC clearance to waive its management fee if performance over a three-year period is negative.

The rules also require a fund company that gets extra pay for doing well relative to a benchmark to suffer a similarly size reduction in pay if it does poorly. That isn’t the case at hedge funds, where managers typically get their base pay even if returns fall into negative territory."

Is anyone surprised that Marsh & McLennan Cos.’ Putnam Investments was involved? (I’m beginning to suspect that there’s some sort of taint involved with that firm). Other funds that are accused of overcharging investors, according to WSJ and SEC fund filings, include n/i numeric investors Small Cap Value Fund, Gartmore U.S. Growth Leaders Fund, closed-end Taiwan Fund and WWW Internet Fund (which was liquidated last fall).

The Journal notes that "There’s now a risk that "the regulatory scrutiny either frightens off firms that are considering such fees or even forces firms already using fees to jettison them," noted Kunal Kapoor, director of fund analysis at researchers Morningstar Inc.

However, I just became aware of a two new no load mutual funds being launched with a similar fee structure — Tilson Focus Fund (a value-oriented investment) and the Tilson Dividend Fund (undervalued with high relative dividend yields /covered call options).

I have only a passing familiarity with manager Whitney Tilson‘s performance record — I am much more familiar with him through his writings on and Motley Fool, as well as his monthly newletter. He strikes me as an thoughtful and honorable money manager, who over the years has demonstrated a motivation to do right by his clients. Thus, he is a rarity on Wall Street, and we wish him luck with his new funds. (As always, readers are advised to do their own homework before investing).


Funds Made Math Mistakes on Fees
Errors Mean Some Investors Overpaid for Performance, SEC and Auditors Find
THE WALL STREET JOURNAL, April 8, 2005; Page C13,,SB111292505157301656,00.html

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  1. AlphaQuant commented on Apr 16

    I’m sorry but from what’s posted above and without access to the WSJ I couldn’t quite make out what the issue is here. Did the funds miscalculate their performance fees or are performance fee structures in general under contention?

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