Lindner adopts exit fee to discourage market timers
November 2, 1998
Ryback Capital Management, adviser to the $2.2 billion family of eight no-load Lindner Funds, is reviving a charge on rapidly withdrawn assets.
Effective Oct. 1, a two percent charge will be levied on assets kept in all but one of the group's money funds for less than 60 days. Shareholders who invest assets for longer than 60 days will not have to pay the charge. The fee goes back to the fund and does not benefit the adviser.
The fund's board of directors agreed to reinstate the redemption fee, which had been lifted in 1994, according to documents filed with the Securities and Exchange Commission.
"We're trying to send a message," said John Prosperi, Lindner's marketing manager. Short-term trading is disruptive to portfolio managers, he said. Although Prosperi says short-term traders are not causing the managers cash flow problems, Lindner has seen its asset levels almost halved since a year ago when it had $4 billion under management.
The motivation for imposing the fee is to separate the short-term from long-term thinkers, Prosperi said. Lindner, which has been focusing on the investment adviser and fee-based channels of distribution, says that it usually can put a halt to brokers making hasty trades. But, there has been especially heavy trading in one of Lindner's broker/dealer wrap programs, Prosperi said.
Although redemption fees are not new, not all companies use them. Currently, however, they seem to be enjoying a resurgence.
Charles Schwab recently instituted new limits on frequent trading for funds available within its OneSource Mutual Fund Marketplace (see MFMN 10/05/98). Beginning in late November, retail investors must remain within a fund for at least 180 days or face a 0.75 percent redemption charge. That time requirement was doubled from 90 days. A Schwab spokesman said the holding period was lengthened, at least in part, at the suggestion of fund sponsors.
According to Morningstar of Chicago, specialty or narrowly focused funds, which typically have more volatile and smaller asset bases, often tack on redemption fees to discourage frequent trading. According to Morningstar analyst Bill Rocco, such funds usually charge a 0.75 percent to one percent fee to redeem.
Companies are doing so even though Morningstar has found that imposing such fees does not seem to discourage outflows of assets in a bearish market, says Rocco. It is not clear how high fees need to be to discourage redemptions.
Lindner Funds currently has other worries besides market timers. Two weeks ago D.E. Shaw, a brokerage company in New York, announced it had suffered losses on its D.E. Shaw Securities Trading hedge fund. One of D.E. Shaw's dozen subsidiary companies is Boston-based FarSight Financial. FarSight developed the Lindner Funds' award-winning website and is the broker-dealer affiliate that handles Linder's online transactions. Prosperi of Lindner said D.E. Shaw's problems have had no impact on Lindner's website. But, he says the company is watching.
A D.E. Shaw spokeswoman declined to discuss the hedge fund's status. But John DeSouza, spokesman for FarSight Financial said, "FarSight will not be affected by what is happening with D.E. Shaw Securities or D.E. Shaw Investments." FarSight currently provides brokerage services to the Lindner Funds as well as to the Gay Financial Network and is negotiating to provide services for two other content providers.