Investor Education

Investor Education
Investor education

Implications of Investing

What you pay for a fund

One important way to compare funds is to compare the fees, expenses, and taxes associated with them. You can make better investing decisions when you understand the true costs behind the mutual funds you select.

In this section:

When you hear about a front-end load or a no-load fund, “load” refers to a sales charge or commission paid to a broker by an investor purchasing the fund. A front-end load means you’ll pay a percentage of your investment as a fee at the time you purchase shares. Back-end load means you’ll pay the sales charge when you sell your shares. A no-load fund means you won’t pay a sales charge at all.

No-load funds are advantageous not only because they do not create a conflict of interest for brokers who might try to push high-commission funds, but because they help maximize your investment. When a sales commission is taken out of your initial investment (front-end load), you have less capital to work with, which translates into a lower overall return. Similarly, your overall performance will be less once back-end sales charges are deducted from the sale of your shares.

You can see the maximum sales charges for a fund in its prospectus. Wasatch Funds are no-load funds. Click here to Compare Funds.

Note: No-load funds may still include an on-going "12b-1" fee of up to 25 basis points annually, or 0.25% of the fund's net assets. This is a fee used to offset sales, distribution, and marketing costs of the fund. A fund with a 12b-1 fee above 25 basis points is considered a "load" fund. Wasatch Funds do not have a 12b-1 fee.

Load vs. No-Load example for a $10,000 investment (assumes a 9% annual net return and redemption at the end of year 3):

 what you pay for a fund

This information is hypothetical and does not represent any investment in the Wasatch Funds.

There are a variety of costs necessary in operating a mutual fund, including portfolio management, shareholder servicing, custody, accounting, compliance, legal, tax, administration, etc. In many cases these services are performed by a network of service providers.

Fund expenses, in total, comprise the expense ratio of a fund, which equals the fund’s total operating expenses divided by the value of the fund’s assets. The expense ratio tells you what percentage of the fund’s assets is used to run the fund.

A fund may have a cap (limit) on its total expense ratio. Expense caps are used for the protection of shareholders from unreasonably high expenses. High expense ratio scenarios are most common when a fund first launches or has not yet attracted a sizeable amount of assets. When a fund’s expenses exceed its stated cap, the mutual fund company pays for the additional expenses. Note: There are certain fund expenses that may be excluded from the expense cap, as detailed in the fund’s prospectus.

When comparing the total operating costs of different mutual funds, the (Net) Expense Ratio is most relevant number to compare.

It’s important to evaluate a fund’s expense ratio relative to the services provided by the fund. A fund’s stated performance returns are always net of the fund’s operating expenses, which gives you an accurate picture of your actual return from the fund, regardless of whether the fund’s expense ratio is low or high. Seeking funds with lower expense ratios does not necessarily translate into better returns than funds with higher expense ratios. A mutual fund company may have a more costly research process or be more skilled at portfolio management, and therefore charge a higher fee than other funds. If the research process is successful, the fund may well deliver better net returns to shareholders despite the fund’s higher expense ratio. You can find a fund’s expense ratio in its prospectus. Click here to Compare Wasatch Funds using expense ratios or other factors.

Note: The commissions paid to brokers who execute the trades for a mutual fund are not included in the total expense ratio. The total cost of such commissions will depend both on the amount of trading done in the portfolio and on the price paid to the broker on each trade.

At Wasatch, we strive to keep our fee structure as simple as possible, and we believe that the Net Expense Ratio is the most important number for shareholders to consider in understanding the true cost of each fund.

Wasatch Advisors provides a number of services in operating the Wasatch Funds, the most important being that of portfolio management. Some mutual fund companies separate the portfolio management fee from additional fees charged by the mutual fund company, which can make the menu of fees confusing and deceptive. Wasatch Advisors instead aggregates all services provided and charges a single management fee appropriate for each fund.

When determining the appropriate fund management fees and expense caps, we look at each fund individually to consider:

  • The uniqueness of the fund, and the value of our research process and skill for that fund
  • The economics of managing the fund
  • The competitive environment, including the fees charged by products most similar to the fund

We seek to set a fee that long-term shareholders will consider to be fair and worthy of the services provided on every Wasatch fund. We have also placed expense caps on almost every fund to protect our shareholders during unusual circumstances*.

We do not expect our fees to appeal to all investors. More important to us is that those investors who buy Wasatch Funds understand the Wasatch research approach and how it drives our fee philosophy. For example, we believe the micro cap asset class is one of the most compelling investment arenas. However, to maximize success in this space it is critical to keep a tight limit on assets under management. We therefore keep our micro cap funds small, and may close them to new investors to protect our existing shareholders. This greatly limits the revenue potential for these funds, which are also some of the most costly for us to operate due to the level of due diligence required across the expansive universe of micro cap companies. Consequently, we must either charge fees that are higher than most mutual funds or be willing to let the funds grow larger in assets which can adversely affect the performance of the fund. We have chosen the former because we believe this approach will better serve the interests of our fund shareholders over the long-term.

We re-evaluate fees and expense caps on at least an annual basis, using the long-term lens appropriate for each fund.  Each November our fees are negotiated and approved by the Wasatch Funds Board of Trustees—the group elected by shareholders to represent and protect the best interest of our shareholders on all fund matters.

* High expense ratio scenarios are most common when a fund first launches or has not yet attracted a significant amount of assets. Expense caps are not used on the Wasatch Long/Short Fund and the Wasatch Income Fund due to unique circumstances of these funds.

Funds may charge a short-term redemption fee to an investor who buys and then sells a fund within a short period of time (typically within 60 to 90 days of the purchase); this fee is meant to discourage frequent or short-term trading. Short-term trading is a concern in the industry because it can harm other participants in mutual funds. In 2003, it was noted that some investors were trading rapidly in and out of certain mutual funds to make quick profits. This was harmful in two ways. First, to cover the sale orders of short-term traders, the fund was forced to maintain larger than necessary cash positions which may have affected the performance of those funds. Second, short-term trades increased the trading costs of these funds, thus penalizing long-term investors. As a result, many mutual funds implemented a short-term redemption fee.

You can find the fees that apply to a mutual fund in its prospectus. Read the prospectus carefully to see what fees apply to a particular fund. Each Wasatch fund carries a 2% short-term redemption fee for investments held less than 60 days. You can view the Wasatch Funds Prospectus here.

One of the categories that contributes to a mutual fund’s overall expense ratio is that of fees. There are many different kinds of fees—and not every mutual fund charges every kind of fee.

A management fee is how much a mutual fund's advisor charges to manage the investments in the fund. Most advisors charge a flat-rate management fee, while others may increase the management fee as the fund’s performance increases.

Non-management fees, or operating expenses, also pertain to the operation of the fund. They might include transfer agent expenses, legal and accounting expenses, printing and postage of fund literature, etc.

12b-1 service fees are charged to cover a fund’s marketing expenses and sometimes brokerage commissions. True no-load funds do not have 12b-1 fees, but some no-load funds charge them to investors anyway. Wasatch Funds are true no-load funds and do not charge 12b-1 fees.

There are a wide variety of investor fees that are determined by a mutual fund company. An early redemption fee, for example, may be charged to an investor who gets in and out of a fund within a short period of time (typically within 60 to 90 days of the purchase); the fee is meant to discourage frequent or short-term trading so the fund can maintain the necessary liquidity.

Short-term trading is a concern in the industry because it can harm other participants in mutual funds. In 2003, it was noted that some 401(k) plan participants were trading rapidly in and out of certain mutual funds to make quick profits. This was harmful in two ways. First, to cover the sale orders of short-term traders, the fund is required to maintain larger than necessary cash positions. Second, numerous short-term trades increase the operating costs of the fund, thus penalizing long-term investors.

You can find the fees that apply to a mutual fund in its prospectus. Read the prospectus carefully to see what fees apply to a particular fund. You can view the Wasatch Funds Prospectus here.

If you buy a mutual fund in a tax-deferred account like an IRA or 401k plan, then you will be taxed based on the value of the mutual fund at the time of withdrawal.

If you hold mutual funds in a regular taxable account there are two different ways that your tax burden may be divided.  Mutual funds are required to distribute net income and realized capital gains to all shareholders at least annually through what are referred to as distributions. These distributions are paid to all fund shareholders as of a stated date, and they are taxable in the year they are distributed. Most mutual funds will give you the option of taking your distributions in cash or simply reinvesting them back into the fund. (Note: distributions that are reinvested in the fund are still taxed in the year of distribution.) You should receive an annual tax statement from the entity through which you purchased the mutual fund notifying you of any taxable distributions.

So that shareholders are not double-taxed on mutual fund gains, the fund’s NAV (net asset value) is reduced by a corresponding amount on the day that the distribution is paid. Consequently, when you go to sell a fund, any gains you have received from prior distributions will have been removed from the NAV before the capital gain/loss is calculated on the sale of your investment.

Some mutual fund shareholders mistakenly believe that distributions are the annual return on their investment (like the interest you might receive from your savings account). This is not the case; in fact it’s possible to have no capital gain distribution in a year when your mutual increased in value, or vice versa. The annual capital gains distribution is determined by the trades made in the portfolio during that year and the corresponding gains or losses to the fund from those trades.

Funds take different approaches to managing their distributions. Some managers pay no attention and let the distribution fall as it may, while others try to minimize distributions in order to reduce the immediate tax burden to shareholders. If all shareholders entered and exited the fund together the best tax strategy would probably be to minimize distributions and let the gains flow through as long-term capital gains at the time of sale. Unfortunately, with a fluid set of shareholders, this approach of deferring capital gains can result in newer shareholders essentially buying into unrealized gains that will have to be distributed to shareholders in the future. In this scenario these shareholders would receive an allocated portion based on their current ownership even though they did not participate in the original gain.

Wasatch believes the fairest approach to distributions is to try to keep our annual distributions roughly aligned with the annual return for each fund. By doing this, we even out the burden of taxable distributions—newer shareholders are not burdened with unrealized gains from previous years in which they did not own the fund. This practice also discourages shareholders from “gaming the system,” or selling before distributions are made, and thus burdening other shareholders with larger capital gains. Our approach is more art than science, and we will not allow distribution management to overshadow our investment objectives. Our investment decisions come first, but we may make adjustments at the margin in order to more approximately match distributions with gains.

You can see a fund’s history of paying dividends and distributions in its annual report and prospectus. Click here to view Wasatch Funds distributions.