Acquired Fund Fees and Expenses (AFFE)

What Are Acquired Fund Fees and Expenses (AFFE)?

Acquired fund fees and expenses (AFFE) are a line item in a multi-manager or fund-of-funds (FOF) prospectus that shows the operating expenses of the underlying funds. This became a requirement as of January 2007. This line item is now included with the fund’s fee schedule under the "fees and expenses" heading and in its prospectus.

Understanding Acquired Fund Fees and Expenses

Acquired fund fees and expenses are associated with multi-manager and fund-of-funds options that have more complex fee structures. These fees increase the total annual expenses of a fund and include management fees paid to multiple managers.

A fund of funds (FOF) is a pooled investment fund such as a mutual fund or hedge fund that does not pick its own investments. Instead, these FOFs invest in other mutual funds or hedge funds. In other words, its portfolio contains different underlying portfolios of other funds managed by their own portfolio managers. These holdings replace any direct investments in assets like bonds, stocks, and other types of securities. The fund of funds (FOF) strategy aims to achieve broad diversification and appropriate asset allocation with investments in a variety of fund categories that are all wrapped into one portfolio.

An investor who purchases an FOF must pay two levels of fees. Just like an individual fund, an FOF may charge management fees and a performance fee, although the performance fees are typically lower than individual mutual funds to reflect the fact that most of the management is delegated to the sub-funds themselves.

SEC Regulation and Disclosure

In January 2007 the Securities and Exchange Commission (SEC) began instituting new provisions to the Investment Company Act of 1940, which made it easier for fund companies to register fund-of-funds options. The SEC broadened legislation under Section 12(d)(1) of the 1940 Act for multi-manager funds. The SEC also revised its registration statement forms to include additional detail on the expenses for these funds. Specifically, registration statements now require that fund managers include "acquired fund fees and expenses" as an added fee disclosure requirement for multi-managers, which must be included in the comprehensive fee schedule found in the prospectus.

Prior to 2007, fund-of-funds investing was only allowed under specific circumstances approved by the SEC. In most instances, these fund-of-funds investments would report expense ratios of zero. Disclosure was misleading, presenting that there were no expenses and reporting that there would be operating expenses incurred by the various underlying funds in the portfolio.

The new AFFE requirements now provide for more transparent disclosure of the combined relationships and expenses incurred by shareholders. The AFFE line item is added to a fund's fee schedule and is in addition to other standard expenses of a fund. AFFE is established as a comprehensive fee made up of the individual fees the investment advisor agrees to pay to the multi-managers. AFFE can range from 0.02% to 10% depending on the agreements with individual managers.

Example: Neuberger Berman Absolute Return Multi-Manager Fund

The Neuberger Berman Absolute Return Multi-Manager Fund provides one example of the fee structuring found in multi-manager funds. The Fund is an open-end mutual fund offering Class A, Class C, and institutional shares.

Standard fees apply to the fund with management fees ranging from 1.92% to 1.81% across share classes. Distribution fees are charged for the Class A and Class C shares at 0.25% and 1.00%, respectively, with no distribution fee for institutional shares. Total other operating expenses range from 1.04% to 1.02%. Acquired fund fees and expenses round out the last fee expense line item for the Fund, with all share classes paying a 0.05% fee. Total annual expenses with waivers range from 3.94% to 2.83%.