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Vanguard lowers fee expense ratios and other changes on Primecap funds
New benchmarks. Performance adjustments. Expense reductions (in addition to those initiated at the beginning of the year). Looks like Vanguard thought Primecap needed a dope slap.
"For roughly 40 years, PRIMECAP was paid a simple, asset-based fee: a set percentage of each fund’s assets, billed quarterly. In the six months ending in March 2025—the most recent data available— Vanguard paid PRIMECAP Management nearly $113 million to run PRIMECAP (VPMCX), PRIMECAP Core (VPCCX) and Capital Opportunity (VHCOX). Annualized, that’s roughly $225 million in fees."
"Big numbers, yes—but on a base of roughly $110 billion in assets, it works out to about 0.20%— a reasonable price for access to one of the industry’s most successful stock-picking teams."
"From now on, though, PRIMECAP will be paid differently: a base fee plus or minus a performance adjustment. In English, PRIMECAP will earn more when it beats its benchmark and less when it lags it."
Performance fees in mutual funds are called fulcrum fees. The adjustments must be symmetric (same magnitude for under- and over-performance), like a seesaw and a fulcrum. And like a seesaw (that can't drop below the ground), the maximum adjustment is limited.
Morningstar calculates that performance-fee funds have generated an average alpha -- or risk-adjusted outperformance relative to the appropriate broad market index -- of 0.22 percent annually over the last 15 years through September [2017]. By comparison, active funds that charge a flat fee generated an average alpha of 0.29 percent. ... fulcrum fees leave lots of opportunities for misalignment. They create incentives for managers to take more risk when they’re losing to the benchmark and less risk when they’re winning, regardless of whether those changes are best for investors. [Rest of paragraph contains complaints about how fulcrum fees might be abused, e.g. by picking the wrong benchmark - something neither Fidelity nor Vanguard does.]
I'm troubled by Vanguard omitting the fee adjustment formula from the SAI. Three numbers are needed: (1) the base rate; (2) the maximum fee adjustment; and (3) the rate of adjustment (how many basis points added to management fee for how many percent outperformance).
This is from FLPSX's current SAI:
For Fidelity® Dividend Growth Fund, Fidelity® Low-Priced Stock Fund, Fidelity® OTC Portfolio, and Fidelity® Value Discovery Fund, each percentage point of difference, calculated to the nearest 0.01% (up to a maximum difference of ±10.00), is multiplied by a performance adjustment rate of 0.02% [item (3) above]. The maximum annualized performance adjustment rate [item (2) above] is ±0.20% of a fund's average net assets over the performance period.
The FLPSX prospectus says that its base rate is not more than 0.67% [item (1) above]
The supplements to the Vanguard prospectuses don't provide any of this information. For all we know, the current ER change for VPMAX from 0.29% to 0.27% is due not to a reduction in the base rate, but from a negative performance adjustment (underperforming the S&P 500 for the past three years).
That is, 0.27% could equal 0.29% (base) - 0.02% (performance penalty).
Or the base rate might actually have been reduced to 0.27% with a performance penalty of less than 1 basis point. Who knows?
IMHO - the new Vanguard performance adjustments are publicity, little more. How many people were even aware of Fidelity's adjustments? And of those who were, how many really cared? The adjustment is usually noise.
One exception: BRAGX. Unlike performance adjustments for most funds that are capped at small amounts, Bridgeway allows large adjustments, both positive and negative.
The fund’s record is now [YE 2010] so bad that it is paying customers to invest. This isn’t a joke. The expense structure of Aggressive Investors 1, as well as other Bridgeway funds, calls for higher management fees when the fund beats its benchmark and lower fees when it trails. Based on the formula, Bridgeway’s sponsor is now paying into Aggressive Investors 1 at an annual rate of 0.51% of assets.
Comments
Vanguard paid PRIMECAP Management nearly $113 million to run PRIMECAP (VPMCX),
PRIMECAP Core (VPCCX) and Capital Opportunity (VHCOX).
Annualized, that’s roughly $225 million in fees."
"Big numbers, yes—but on a base of roughly $110 billion in assets, it works out to about 0.20%—
a reasonable price for access to one of the industry’s most successful stock-picking teams."
"From now on, though, PRIMECAP will be paid differently: a base fee plus or minus a performance adjustment.
In English, PRIMECAP will earn more when it beats its benchmark and less when it lags it."
https://www.independentvanguardadviser.com/weekly-brief-perspective-precision-and-primecap/?ref=the-independent-vanguard-adviser-newsletter
Edit: PRIMECAP fund ticker corrected.
Many Fidelity funds have used fulcrum fees for the past decade. As noted in the column below from 2017, they sound better in theory than in reality.
https://www.wealthmanagement.com/mutual-funds/fidelity-s-fee-fix-for-active-funds-comes-up-short-2017-10-19-1- I'm troubled by Vanguard omitting the fee adjustment formula from the SAI. Three numbers are needed: (1) the base rate; (2) the maximum fee adjustment; and (3) the rate of adjustment (how many basis points added to management fee for how many percent outperformance).
This is from FLPSX's current SAI: The FLPSX prospectus says that its base rate is not more than 0.67% [item (1) above]
The supplements to the Vanguard prospectuses don't provide any of this information. For all we know, the current ER change for VPMAX from 0.29% to 0.27% is due not to a reduction in the base rate, but from a negative performance adjustment (underperforming the S&P 500 for the past three years).
That is, 0.27% could equal 0.29% (base) - 0.02% (performance penalty).
Or the base rate might actually have been reduced to 0.27% with a performance penalty of less than 1 basis point. Who knows?
IMHO - the new Vanguard performance adjustments are publicity, little more. How many people were even aware of Fidelity's adjustments? And of those who were, how many really cared? The adjustment is usually noise.
One exception: BRAGX. Unlike performance adjustments for most funds that are capped at small amounts, Bridgeway allows large adjustments, both positive and negative.
From Kiplinger, Jan 31, 2011