Fund with $100 minimum counts on bigger stuff later

Your Funds

Dollars & Sense

March 10, 2002|By Charles Jaffe

THE minimum amount needed to open a fund account has gotten to the point where there are more funds that require $1 million upfront than there are funds that will let you in for $1,000.

But even $1,000 is too much for some investors. That's why a recent move by the Forward Funds to lower the price of investing to $100 per account is worth looking into.

If you're a small-dollar investor - someone wanting to invest in mutual funds in dribs and drabs - any firm that cuts minimums is worth investigating. For any fund investor, the 15-year trend that has made low-minimum funds virtually extinct also deserves examination. There are no statistics kept for average minimum amount, but the majority of funds today - particularly the big firms - have a ticket price of $2,500 or more.

Some firms maintain a "soft minimum," allowing investors in for less if they'll deposit money monthly. (If you can't make a firm's minimum, ask about waivers for automatic investments, or check out www.mfea.com, the Web site of the Mutual Fund Education Alliance, for a list of funds that let you in for $50 or less).

The reason for rising minimums is simple: Fund companies lose money on small accounts.

A fund charging a 1.5 percent expense ratio on a $500 account brings in just $7.50 per year on that money. At Forward's $100 minimum, the expense ratio won't even cover postage and printing costs for statements, reports, and prospectuses.

Further, studies show that owners of tiny accounts demand on average just as much service as owners of million-dollar accounts. As a result, firms staff call centers based on the number of shareholders they have, regardless of the size of the accounts involved.

"One phone call from a shareholder to the fund family would blow the whole seven bucks," says Brian Mattes of the Vanguard Group. "It's great to say you have a lot of small accounts, but fund companies don't make their money on volume, they make it on the money they have to invest."

Even firms such as TIAA-CREF - which for years prided itself on a $250 minimum but recently moved that to $1,500 - have been forced to raise both their entry point and the amount you must invest monthly for them to waive it. (The alternative would have been to raise expenses, which would have hurt larger investors.) The break-even point varies for fund firms, but a good proxy for the industry might be American Century, which long prided itself on having no minimum and then a low entry point.

Today, the company has a "hard minimum" of $2,500 for most funds, meaning it won't let you in for less, even if you sign up for automatic monthly investments. Further, shareholders with less than $10,000 total with the company are charged an account maintenance fee.

The lesson: You're not a profitable account for the average fund firm until you have $10,000 invested. The result: Small-dollar investors generally have had to settle for high-cost funds with so-so performance, because the really attractive issues aren't about to lose money catering to peanut-size accounts.

Furthermore, it's the large investors who end up paying the carrying costs for the small fry.

A pay-for-service fee structure, where expenses are based either on what you use (lower-cost shares for accepting all statements online) or how much you have in the account would be more fair. This would function like Vanguard's "admiral" class of shares, where longtime shareholders and investors with large accounts pay less in expenses than small-account holders in the ordinary "investor" class shares.

Which brings us back to the incredible $100 entry requirement now offered by Forward (www.forwardfunds.com), a firm with four funds that was known mostly for two things: gazillionaire Gordon Getty, who is behind the management team, and Wall Street soothsayer Elaine Garzarelli, who runs one of the funds. (Garzarelli, known for correctly forecasting the 1987 market crash, has generally been a bust as a fund manager.) Most fund firms with ultra-low minimums have high expenses; Forward's are slightly above the industry average of 1.4 percent, with costs running at roughly 1.6 percent. Performance, with the exception of a good small-cap fund run by Irene Hoover, has tended to be below average.

Alan Reid, president of Forward Management, talks a magnanimous game, noting that the firm is giving small investors a chance to get back in the game, but he is clearly hoping that investors who try the funds will grow into bigger, profitable accounts over time. Forward's board has authorized the new low minimum for a year.

Says Reid: "We'll hang our hat not on being the cheapest fund on the street, but on being fair to shareholders and giving them decent portfolio management."

Fair enough, but when it comes to picking a fund, focusing solely on the entry price means looking at the wrong thing. If a low minimum investment is a fund's only big attraction, look elsewhere.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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