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Money Management

Ariel board tells CEO John Rogers to cut fees as clients pick passive

John Rogers, chairman and CEO of Ariel Investments, said his $11.8 billion mutual fund firm is cutting fees partly in response to pressure from board members.

In meetings this month, directors have recommended that fees should be at the industry average or lower, Mr. Rogers said in a Bloomberg Television interview Monday. Ariel is ratcheting back its charges on global funds, he said.

"The fee compression is real," said Mr. Rogers. "Over time, we have definitely seen our average fees go down."

Investors have been flocking to passively managed index mutual and exchange-traded funds for their lower fees and better performance. In the U.S., they poured more than $700 billion into passive mutual funds and ETFs in the 12 months through July while withdrawing a net $214 billion from actively managed ones, according to a report by Morningstar this month.

The shift has put active managers under pressure to reduce costs and improve returns. It's been particularly difficult as a lot of institutional clients have moved their domestic equities into index and ETFs, Mr. Rogers said.

"You get calls from clients who say we are indexing everything irrespective of your 34-year performance," he said. "That is extremely challenging."

Mr. Rogers founded Ariel in 1983 and specializes in finding undervalued, out of favor small- and midcap stocks. The growth of indexing is distorting the stock market, Mr. Rogers said, but value-based investing will eventually come back into favor once there is a stock-market correction of 10% to 15%.

"When people buy stocks irrespective of valuation, that always ends badly," he said.