Fund Manager Chris Davis, a Good Guy in a Land of Theives

People on Wall Street are often times portrayed as being greedy money grubbers who are only concerned with the bottom line. While this stereotype might not necessarily be untrue, it isn’t accurate all the time. News sites and the rest of the media often concentrate on the greed aspect, this site included, but its equally refreshing and newsworthy in my opinion when someone decides to go against the grain.

That’s why I took such joy when I read an article from Fortune Magazine entitled “Gasp! Fund Manager Commits Selfless Act”. The article talks about a bold move made by fund management company Davis Advisors who decided recently to voluntarily reduce fees on some of its funds.

The firm, which runs the Davis New York Venture (NYVTX), Selected American Shares (SLASX), and Clipper (CFIMX) mutual funds, has voluntarily reduced management fees on those funds and six others. Not because of a problem, not because of competition, but because it wanted to do the right thing for investors.

They didn’t do this fee cut for publicity or to get some public sentiment on their side either. The fee cut actually took place on July 1st. Allan Sloan, the author of the Fortune piece, happened to stumble upon the cut while reading one of the funds shareholders report. The cut was simply buried in a footnote where it was hardly noticeable.

Now this cut is hardly a dramatic one when looked at on an individual basis. The cut topped fees out at 0.55%. For example on the Clipper and Selected American funds people were paying0.65% and on Davis New York fund they were paying 0.75%. While only a small cut, the number is a fairly big number for the Davises. They are basically walking away from $3.3 million a year in fund fees that they could have easily collected by simply remaining to do what they had been doing.

Russ Kinnel, Morningstar’s director of mutual fund research, says that giant firms like Fidelity, Schwab, and Putnam sometimes cut fees for competitive purposes. But it’s very unusual, he says, for an already low-cost outfit like Davis to cut fees on the funds that are the core of its business.

So what’s going on? Chris Davis, the third-generation head of the family-owned management firm, says it cut fees because it was the right thing to do. “If we were starting those funds today, we would start out charging 55 [hundredths of 1%],” he says. “There’s no reason that investors in those funds should be prisoners of history.”

The way that the fees are calculated for these funds is through the use of “breakpoints”. This means that as the size of the fund increases, each new dollar pays a less than average fee while increasing the total income of the fund. Its really a cyclic process as the more money the fund manager makes, the less money investors pay as a percentage of their investment. Its almost like taking virtue and ethics into the business plan already a little bit. Its really not your standard Wall Street business plan.

But when the funds got clobbered in the 2008 to early 2009 bear market, funds’ assets fell below their breakpoints, so average fees rose at the same time that the value of investors’ shares were being eviscerated. That bothered the Davises, who have more than $1 billion of their own money in their funds, and thus shared investors’ pain. (And no, they’re not cutting fees to save their own money — they own only 4% or so of the affected funds.)

In addition, Chris Davis says, the managers felt they should give up some fees because fund investors were taking enormous hits, some of which he attributes to his faulty investment decisions.

So not only is fund manager Chris Davis showing a little heart and feeling bad for investors, but he’s also stepping up to take some responsibility for people losing money. This is really a departure and I think Gordon Gecko would be extremely disappointed in his actions. There’s not supposed to be any heart on Wall Street. Having a heart can only get in the way of making more money. Fortunately, it seems that not everyone thinks that way.

This seems like a big departure from the recent greed of some other fund managers that have made the news such as Raj Rajaratnam and the Galleon insider trading scandal. Greed dominated actions such as those are what we’ve come to suspect from people in this situation. It might not be right, but since when have ethics ever had a place in a board room. Wall Street acting good? I know its a little hard to swallow but because its so rare is why I figured it deserved to have some attention drawn to it. So a big round of applause for Mr. Chris Davis as he shows a little heart and bashes the Wall Street stereotype.