High minimum investment is no guarantee that performance will be high


The mutual fund industry, heralded for giving the common man easy access to world financial markets, has its Range Rovers as well as its Buicks. The Range Rovers require a big initial investment, and their elite image suggests one thing: If you can afford to plunk down the money for one of these prestige funds, you will leave the Joneses in the dust.

But the money might be better spent on the luxury car than on the fund. Image aside, the high-minimum funds don't always deliver more power than the low-down-payment models. Their expenses tend to come in on the low side, reflecting economies of scale, but their performance is all over the map. Past winners in the group include Brandywine, GAM International and Longleaf Partners.

A thorough examination of the category, though, turned up a slew of poor performers, too.

Nearly 5 percent of the 6,000-plus funds tracked by Morningstar Inc. require investments of at least $10,000 and are open to individual investors. Investors longing for the big time can choose among 283 stock and bond funds. Only 125 of these funds have been around long enough to have a three-year track record, and a mere 86 go back more than five years.

Fostering an elite image can be good for a fund. Cohen & Steers Realty Shares, for example, started out with a $100,000 minimum investment. "Many of the investors we wanted to attract wanted the fund to have an institutional panache," said Martin Cohen, co-manager of the $500 million, 4-year-old fund, now open to anyone with a mere $10,000.

Plenty of funds follow the Cohen & Steers pattern, starting out high and later lowering the barrier. The Longleaf Partners Fund dropped its minimum last year to $10,000 from $50,000.

One way to circumvent high minimums is to go through discount brokers. Longleaf, Cohen & Steers and many other funds can be bought in lots as small as $2,000 through discount brokers, like Charles Schwab & Co. and Jack White & Co.

But just because you can come up with enough money, or a back door, doesn't mean you should buy. The high-minimum funds do keep their expenses down -- their biggest selling point. Morningstar says the average for stock funds requiring at least $10,000 of investors is 1.26 percent of assets, compared with 1.48 for the entire stock fund category. And high-minimum bond funds have average expenses of 0.17 percent of assets, compared with 0.97 percent for all bond funds.

Aside from low expenses, though, the group has little to boast about. Jeff Kelley, a Morningstar analyst, found no pattern of oversized performance among the funds with oversized entry requirements.

In the growth stock category, for example, there were 11 funds with high minimums that had been around five years. Brandywine, which requires investors to ante up $25,000, and Longleaf Partners were well ahead of the growth fund average in total return for the period. But four of the funds had returns below average.

In the small-company category, Morningstar turned up six funds with high minimums. Two beat the average in the five-year period: Berwyn and Managers Special Equity.

In the balanced fund category, there were four high-minimum funds. One, FBP Contrarian, was a star performer, but the other three underperformed significantly.

Even looking for funds with exceptionally low expenses doesn't turn up winners. From the list of foreign funds with high minimums, the two with the lowest expense ratios were Glenmede International and Vanguard/Trustees Equity International. Glenmede beat the foreign fund average over the last five years, but Vanguard was a laggard.

Expenses are especially important, of course, for fixed-income funds, whose returns tend to be tightly bunched and whose expenses can make the difference between impressive and disappointing performance. Companies have taken to high minimums in this area particularly. The only high-minimum funds from Fidelity Investments and T. Rowe Price Associates, for example, are in the fixed-income category.

Still, maturity tends to be the biggest determinant of their performance. So fixed-income funds that dutifully kept expenses low, but guessed wrong on the direction of interest rates, underperformed. Among the several categories of bond funds tracked by Morningstar, the high-minimum funds with the lowest expenses repeatedly fell short of their peer group average.

The major exception was in high-quality corporate funds. The high-minimum funds with the lowest expenses were Bernstein Intermediate Duration and Advance Capital I Bond, both of which did better than average for the last five years.

High-minimum funds, it turns out, look remarkably like all the other funds in performance. Some are turbocharged and some are duds. And they aren't all worth the sticker price.

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