SHORT-TERM REDEMPTION FEES

With so many fund share redemptions these days, a number of mutual fund families have instituted Short-Term Redemption fees (“STR fees”):  For example, if any shares of FBR Small Cap Financial are sold within 90 days of purchase, the fund will charge 1%, reducing the proceeds of the sale.

Unlike commissions (also known as sales charges or “loads”), STR fees go back into the fund, to offset the higher costs of buying and selling portfolio assets when people move money in and out in short periods.

At Sierra, we of course try to avoid funds with STR fees whenever we can find a well-managed fund in the same category without such fees.  However, in some instances a fund may be uniquely attractive, with no close substitute (current examples include FBR Small Cap Financial and UAM FPA New Income), so we may use the fund in client portfolios despite the STR fee policy.

We consider STR fees as just an increment to the risk we take when we buy a fund.  If we (or any specific client) end up having to sell the fund within the STR fee period, we can hope that the fund did enough better than its peers to justify the extra cost.

·        For accounts held at Schwab, be aware that – in addition to STR fees imposed by various funds – Schwab charges STR fees of its own:  Many mutual fund families now pay Schwab about 25 basis points a year (1/4 of 1%) on their fund assets held in Schwab accounts, in return for which Schwab offers those funds to investors with no transaction fee (“NTF” funds).  But for retail clients who sell any NTF fund shares within 6 months of purchase, Schwab will charge a transaction fee (STR fee) on those redemptions.

For Sierra clients, the STR fee period is reduced, so only NTF fund shares sold within 91 days are subject to the fee.