SEC Cracks Down on High Cost Funds - Best of Funds

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The Securities and Exchange Commission is keeping a "laser like focus" on problem brokers. A sneak peek into SEC's examining brokerages in 2015 offered by a SEC official and as reported by Reuters confirms that the regulatory body has its eyes on expensive mutual funds. An examination earlier in May by the regulator had found over 50% of allocated expenses and fees collected to be inappropriate and in certain cases they were illegal too.

We at the Mutual Fund Center of Zacks have been stressing on the expenses of mutual funds at regular intervals. This is crucial as many investment decisions related to mutual funds depend a lot on how much an investor has to shell out before he gets the desired return.

We will pick 3 high expense funds that also carry unfavorable Zacks Rank. These funds that we have chosen are not in relation to the SEC crack down. Instead, they have poor performance measures that have led to an unfavorable Zacks Rank. Before we reveal the funds, let's dig deeper into the SEC crackdown.


SEC Forms Investigation Squad for Pvt Equity & Hedge Funds

In April this year, the SEC had reportedly set up a group to keep a watch on private equity and hedge funds. The 2010 Dodd-Frank necessitates that funds must be regulated. The SEC keeps examining brokerages to see if they are complying with federal security laws.

The SEC has historically examined mutual funds for decades. However, as Dodd-Frank act necessitates mid to large private equity and hedge funds to register with the SEC, the regulatory body needed to have specialist examiners, as the hedge funds hold complex illiquid investments.

Over 50% Firms Allocated Expenses Inappropriately

Terming the findings of SEC's examination of private equity firms as "remarkable statistics", Drew Bowden, director of the SEC's Office of Compliance Inspections and Examinations, said that more than half of 112 examinations conducted found inappropriate expense allocations.

The examination conducted for checking fees and expenses found "violations of law or material weaknesses in controls". The violations related to the expenses and fees that investors had to pay.

Bowden said: "For private-equity firms to be cited for deficiencies involving their treatment of fees and expense more than half the time we look at the area is significant".

The SEC believes that investor returns are being hurt by a combination of factors. This includes incomplete disclosures relating to what are known as monitoring fees. These are levied by private equity firms on companies which they own. Typically, they are charged for board and related advisory services provided by private equity during their duration of ownership.

High Cost Funds Beware: SEC is Watching

Kevin Goodman, head of the broker-dealer examination program for the SEC's Office of Compliance Inspections and Examinations, confirmed that SEC is determining "examination priorities" for 2015.

A concern that emerged out of the preliminary version of the priorities was that brokerages are selling expensive share classes of mutual funds. There is "an explosion" of 'L-shares', said Goodman. These funds have very high upfront costs.

The SEC is also inclined to find out if investors are aware of the charges they pay for different share classes. Goodman said: "We want to make sure these share classes aren't being chosen or marketed based on the higher commissions they generate".

The SEC is also planning to look into the brokerage firms' braches. The examiners may focus on individual branch offices next year; which will be picked depending on their "size, trading activities, and sales in certain products, such as an unusual amount of risky complex securities". Goodman said: "We want to target firms that seem to be homes for problematic (brokers)".

Fund Expenses

Investors in mutual funds incur two primary kinds of expenses and fees: fund expenses and loads. Whereas fund expenses are paid indirectly from fund assets throughout the year, sales loads are one-time fees that investors pay either at the time of purchase or when units are redeemed. (Read: Why Expenses are Important for Mutual Funds? )

Investment decisions should factor in the cost of funds. Lower charges will obviously allow a larger share of capital to be invested and also help investors in earning higher profits. For investors looking to profit from low cost funds, read Pay Less to Earn More: 3 Low-Expense Funds to Buy Now .

3 High-Cost, Low-Ranked Funds to Sell

Here we will share with you 3 funds with relatively high expense ratios. These funds also carry sales load and have a negative return over the last one year.

The funds below carry a Zacks Mutual Fund Rank #5 (Strong Sell). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Prudential Jennison Market Neutral B (PJNBX) seeks long-term capital gain while preserving capital during a downturn in US equities. The fund uses "market neutral" strategy by employing long and short positions in equity and related securities. The short exposure, to the equities and equity-based ETFs, are within the 60-100% range.

The fund has returned a negative 4.1% over the last one-year period.

PJNBX has an annual expense ratio of 4.59% as compared to category average of 1.98%. It carries deferred sales load of 5% as compared to category average of 1.6%.

Princeton Futures Strategy A (PFFAX) seeks growth of capital. The fund invests in securities of limited partnerships, limited liability companies, underlying funds and fixed income securities. A maximum of 25% of its assets may be invested in a wholly-owned subsidiary.

The fund has returned a negative 4.2% over the last one-year period.

PFFAX has an annual expense ratio of 3.49% as compared to category average of 2.06%. It carries a front sales load of 5.75% as compared to category average of 5.54%.

Arrow Alternative Solutions A (ASFFX) seeks growth of capital while focusing on positive return, low volatility and less correlation with equities. The fund invests in fixed income securities that are issued by either US government or its agencies. The fund also invests in domestic and foreign corporate debt.

The fund has returned a negative 2.9% over the last one-year period.

ASFFX has an annual expense ratio of 2.03% as compared to category average of 1.73%. It carries front sales load of 5.75% as compared to category average of 5.46%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our  Mutual Fund Center .


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: PJNBX , PFFAX , ASFFX

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