Capital Research funds may reduce advisory fees: rising competition may force more mutual funds' cuts.

Capital Research funds may reduce advisory fees

Investment advisory fees paid to Los Angeles-based Capital Research & Management Co. by two mutual funds it manages here will be reduced if approved by shareholders at their upcoming annual meetings.

The proposed fee-cutting will be voted on March 21 by shareholders of Income Fund of America and April 17 by those of Small Cap World Fund, acknowledged Mike Downer, an attorney in Capital Research's legal department. The income fund's net assets were about $2 billion on Nov. 1, he said, and the world fund's net assets currently exceed $750 million.

The unexpected proposals to cut advisory fees astonished shareholders as well as investment company professionals at other L.A.-area investment advisers.

"I am so cynical that I expected the fees to go up instead of down," declared Art Detman. "But down they're going, which is good news for mutual fund investors, at least those with shares in Income Fund of America," exulted the Pacific Palisades shareholder of that fund.

"There's been more of a trend to increases rather than decreases," remarked a surprised officer at another large investment adviser here.

"Based on data I've seen published, increases have exceeded decreases by 10 to 1, maybe even 20 to 1," observed a partner at a major L.A.-based law firm that has a large practice among investment companies.

However, a senior officer at a local investment advisory firm asserted that he has been expecting some fee reductions because of increased competition. He cited three times as many fund advisers and 10 times the number of mutual funds as 10 years ago.

The Capital Research fee reductions are being proposed so fund shareholders can benefit from perceived economies of scale as the funds have grown in size. Income Fund of America, for example, doubled in net assets size since 1988, the fund's proxy statement indicated.

Investment advisory fees generally are based on a percent of net investment assets under management. That means the bigger the fund grows, said a local observer, the bigger the fees collected by the investment adviser at virtually no increase in expenses.

If shareholders approve, though, the percent is to be reduced on net assets that exceed specified "breakpoints."

Income Fund of America's present contract with Capital Research has one such breakpoint -- $50 million.

That is, the current annual fee is 0.30 percent on the first $50 million of average net assets and 0.21 percent on average net assets in excess of $50 million. In addition, according to the proxy statement, the investment adviser collects 5.00 percent on the first $250,000 of the fund's monthly gross income and 2.25 percent on monthly gross income in excess of $250,000.

The proposed contract provides for additional breakpoints.

That is, the annual fee is to be 0.24 percent on the first $150 million of average net assets, 0.21 percent in excess of $150 million but not exceeding $1.5 billion and 0.18 percent in excess of $1.5 billion. In addition, according to the proxy statement, Capital Research is to be paid 3.00 percent on the first $833,333 of monthly gross income, 2.25 percent in excess of that income.

Capital Research was paid $6.69 million in investment management fees by Income Fund of America in the fiscal year ended July 31, 1990, meaning the fee represented 0.40 percent of average net assets. Had the proposed fee arrangement been in effect in fiscal 1990, according to the proxy statement, the annual fee would have been cut 24 percent to $5.07 million, representing 0.30 percent average net assets.

The lowered fee proposal was negotiated with Capital Research by the Contracts Committee of the fund's board of directors and is being recommended by the board for approval by shareholders.

Small Cap World Fund first was offered to the public last year with no breakpoints, said Capital Research attorney Downer, but, if approved by fund shareholders, a breakpoint will be established at $750 million. That is, he explained, the annual investment advisory fee will be 0.90 percent on the first $750 million of average net assets and 0.70 percent on all average net assets above that breakpoint.

Capital Research, by far the largest registered investment adviser in Southern California, has $38 billion under management for 25 funds.