Hurdles Loom for Gabelli Asset Management

Fund manager Mario Gabelli rose to superstar status by seeing value where others didn't. But recent events have raised a few questions for his followers.

Last week Merrill Lynch analyst Cynthia Mayer lowered her rating on shares of Gabelli Asset Management(GBL Quote) to neutral from buy, in part because of concerns about high fund fees and potential regulation of companies that manage both hedge funds and mutual funds.

Back in September, Gabelli publicly released a memo describing how its funds steer clear of late traders and market-timers. Nevertheless, the sins of the market-timing masses are splattering onto the well-behaved few. Mayer noted that "regulatory exposure is low, but at some point Gabelli's above-average equity fund fees could be pressured."

In other words, Alliance Capital's(AC Quote) recent agreement with regulators to cut its fees has shifted investor focus from fraud to fees. And that's not a good sign for premium providers like Gabelli.

How far above average are Gabelli's equity fund fees? Morningstar's average expense ratio for Gabelli's domestic stock funds is 1.95%, compared with the industry average of 1.50%. Gabelli's international stock funds are closer to the pack at 1.95%, compared with 1.86% for the rest of the industry.

"By and large his funds are expensive. Most funds fall in Lipper's bottom 40% of peer groups when it comes to cost," says Lipper Analyst Jeff Tjornehoj.

Still, being a higher-priced provider in a falling-price environment doesn't bother Chief Executive Mario Gabelli. "Consumers have a choice. They can buy a Fidelity, Vanguard or Gabelli fund," says Gabelli. "Just like they can buy the same Armani shirt in Neiman Marcus or Loehmanns. The shopper has the choice and knows the environment."

With a $37.5 million pay package in 2002, Gabelli can shop on the moon if he wants. And since his funds are tilted toward high-net-worth investors, most of his investors can probably afford the slightly higher fees.

However, investors might want to know what kind of performance they are receiving for those extra fees.