Wasatch's reopening of funds to investors is really quite limited

Your Funds

Your Money

January 30, 2007|By Charles Jaffe | Charles Jaffe,MarketWatch

Wasatch is opening four funds at the end of January. Which one should I buy, or should I buy all four?

- Jim, Richmond, Va.

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. (Full disclosure: My portfolio includes one Wasatch fund, which is unaffected by the reopening.)

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, but just one fund, Wasatch Ultra Growth (WAMCX), will reopen to all investors tomorrow. The other funds - Wasatch Core Growth (WGROX), Wasatch Small Cap Value (WMCVX) and Wasatch Small Cap Growth (WAAEX) - 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."

If closing Wasatch Small-Cap Value was good for me, is reopening it bad for me?

- Henry, Idyllwild, Calif.

Wasatch Chairman Sam Stewart said the firm was reopening the funds because additional assets would help the funds more easily "achieve their on-going 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. If you aleady have automatic deposits, now is the time to raise them, because you can't do that when Wasatch shutters a fund to new and existing investors.

Our financial planner said something about one of our funds doubling its expense ratio, but how it's all on paper and that we have nothing to worry about. I don't understand how someone could double the cost, but not actually charge me for it. Is this possible?

- Betty, Albuquerque, N.M.

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.

Technically, your adviser is right, in that the costs you pay this year will be the same as last. But that doesn't mean the situation should be ignored. 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 logic in hiding those fees was that they were reflected in the net asset value - and therefore the performance - of those underlying funds. The argument that got the rule changed is that a fee is a fee, and consumers should know the real costs they're paying. 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. If the restated expense ratio on a fund of funds is high enough to make you uncomfortable, you're overdue for a change.


Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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