Fund Firm Cuts Fees, And No One Had to Ask

It's a man-bites-dog story. In a world awash in stories about abusive mutual funds, a fund company is doing the right thing by its shareholders by cutting some fees. Voluntarily. Without being sued (or even threatened) by New York Attorney General Eliot L. Spitzer or the SEC or anyone.

I'm talking about Selected Funds, best known for its Selected American Shares stock fund. Selected is a throwback: Its board takes its obligations to shareholders seriously; its manager uses words like "stewardship" to describe his role. "Managing money may not be the highest calling, but we don't have to make it the lowest calling," says Chris Davis of Davis Advisors, which runs the funds.

I discovered the cut, which Selected hasn't publicized, by accident: I've owned Selected for years, and started reading its newest prospectus one night because I couldn't fall asleep and prospectuses are snooze-inducers. But as I began to realize what was going on, I became so engaged that insomnia won, hands down.

Here's the deal. Fund supermarkets run by Fidelity and Schwab have become huge mutual fund players. These two supermarkets hold a total of almost $600 billion of assets, including around 60 percent of Selected American's $6.3 billion of shares. These supermarkets provide one-stop shopping for investors, letting them pick and choose among dozens or hundreds of funds. They're tremendously convenient -- and, seemingly, free.

But there's no such thing as a free lunch -- or a free supermarket. Fund management companies have to pay Fidelity and Schwab for supermarket shelf space -- investors don't get a bill, but fund companies try to build the cost into their fee structures. So investors pay indirectly. Investors who don't use supermarkets or other intermediaries pay the same fees, in effect subsidizing other shareholders.

Selected, which sells both through intermediaries and directly, has thrown down the gauntlet. It has created a lower-cost share class for investors who buy directly from Selected and own at least $10,000 of shares.

Eligible holders can convert to the new Class D (for direct) shares, which don't carry the 0.25 percent annual distribution fee that Selected has collected from all its investors for years. Existing shares became Class S (for supermarket) on May 1, and continue to carry the distribution fee. The difference: $25 a year on a $10,000 investment, reducing the cost of owning Selected American to around $69 from the current $94.

Selected wants to automatically switch eligible holders to D shares unless they opt out, but says it's waiting for the SEC to approve the paperwork. I guess no one quite knows how to expedite selective, voluntary fee cuts. Selected's directors and the Davises say they won't convert any of their families' shares to D until other holders have plenty of time to convert. Pretty classy of them not to move to the head of the line.

"Fund supermarkets provide a very valuable service to shareholders, but if you're not getting it, why should you pay for it?" asks Selected board chairman Jim McMonagle, explaining why the board decided to create D shares. Why, indeed?

McMonagle, a Cleveland lawyer, says that more than $800 million worth of Selected American's shares are eligible for the reduction. If all eligible holders convert -- as one of my children already has -- it will cost Davis Advisors more than $2 million a year in fees that it now collects from them, and gets to keep. No problemo, says Chris Davis: "It's not appropriate for us to charge people for services we don't provide."