Mutual funds' business model is simple: In return for managing their pool of investments on your behalf, they collect a percentage of your holdings each year in expenses. But a handful of funds now offer annual fees of 0% -- or in some cases, negative fees that actually pay you to invest!
This new wrinkle comes from Bridgeway Funds, a shop long known for its progressive ways. No partner earns more than seven times what the lowest-paid partner earns, and 50% of investment advisory fee profits donated to nonprofits. In addition, Bridgeway fund fees are linked to performance, rising in times of strong returns, and falling when returns are poor. Since some of their funds have slumped sharply in the past several years, the annual fee for the Bridgeway Aggressive Investors 1 (BRAGX) fund has fallen into negative territory, while the Bridgeway Micro-Cap Limited (BRMCX) fee recently reached 0%.
When free isn't so great
That may be tempting, but think twice. Fee-less-ness is nice, but not if a fund loses a lot of money. I like the integrity of the fund company, and I realize that many good funds experience a few bad years, but the fund's methods concern me. The Bridgeway funds rely heavily on quantitative models for their investment decisions. It may be that in certain kinds of markets, like the weird ones we've experienced lately, the models don't perform well.
For instance, the Aggressive Investors 1 fund lost more than half its value in 2008, greatly trailing the swooning market. Prior to that, in the fund's Dec. 31, 2007 semiannual report, management noted that its biggest loser was WellCare Health Plans
Also at the time, management praised its Crocs
Also praised were Apple and Research In Motion
Don't rush into low or no fees without looking closely at a fund and its prospects -- unless you enjoy the idea of derailing your retirement.
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