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Mutual fund fees declined in 2011, studies find

By Mark Jewell
AP Personal Finance Writer / April 23, 2012
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BOSTON—Mutual fund fees fell slightly last year, driven in part by demand for low-cost funds.

That's good news for investors, because fees cut into fund investment performance year after year, whether the stock market climbs or falls. Although there's no controlling the market's direction, individuals can control how much they pay to invest.

The latest numbers are in separate reports issued Monday by researcher Morningstar Inc. and by the fund industry's trade organization, the Investment Company Institute.

THE BACKGROUND

Both reports examined average fund expense ratios charged in 2011. That's the ongoing expense that investors pay for operating costs, expressed as a percentage of a fund's assets. To calculate average expenses for thousands of funds, both Morningstar and ICI use a method called asset-weighting. That means that expenses at funds with more assets, and therefore more investors, count more toward the average than expenses at smaller funds.

THE FINDINGS

The typical investor paid 0.75 percent last year, according to Morningstar, or $7.50 for every $1,000 invested. That's down from 0.77 percent in 2010. Morningstar's figure is the average for stock funds and bond funds, as well as funds investing in alternative assets such as precious metals and commodities.

Fees fell more sharply at stock funds than they did at bond funds, Morningstar said. U.S. stock funds charged an average 0.74 percent last year, while funds investing primarily in foreign stocks charged 0.93 percent. Taxable bond fund expenses averaged 0.63 percent, while municipal bond funds averaged 0.60 percent.

The ICI didn't calculate an average across all types of funds. The industry group said stock fund investors paid an average 0.79 percent last year, down from 0.83 percent in 2010. Bond fund investors paid 0.62 percent, down from 0.64 percent the previous year.

Fund companies' fee revenues decline when the stock market falls, because lower asset values result in lower fee collections. The market was essentially flat in 2011, and ICI said stock fund assets were stable, ending the year at about $5.2 trillion. Stock fund assets posted big increases in 2009 and 2010.

The fee declines are in line with a long-term trend of lower fund expenses. Average fees have fallen most years, and investors paid an average 0.94 percent 10 years ago, Morningstar said.

THE KEY FACTORS:

Growth of lower-cost funds: Morningstar and ICI say several factors are driving the decline in fees. One key reason is that a growing number of investors are choosing lower-cost funds.

Morningstar grouped funds based on the expenses charged. It found that the least expensive of the five groups attracted $122 billion in net deposits last year. In contrast, withdrawals exceeded deposits at each of the other four groups.

Most of the funds in the lowest-cost group are index funds. The ICI said those funds continue to attract new cash, while investors are pulling their money out of actively managed funds. Index funds seek to match the market rather than beat it, and generally charge lower fees because they don't rely on professionals to pick stocks or bonds.

Investors in stock index funds paid an average 0.14 percent last year, the ICI said. Investors in managed stock funds paid 0.93 percent, nearly seven times as much.

Despite the faster growth for index funds, managed funds still hold far more cash. About $6 of every $7 in fund assets is entrusted with an investment-picking manager, or a team.

Popularity of bond funds: Overall expenses are falling, in part, because bond funds have been attracting new cash in recent years, while money has been pulled out of stock funds. Bond funds generally charge lower expenses, so the greater share of investor assets they hold is helping to drive average fund expenses lower. Growth in bond funds has made those funds more cost efficient, because there are more investors to pay fees to cover operational expenses, the ICI said.

Fee cuts: Some fund companies have cut their fees, or restructured fees to expand access to lower-cost funds. Morningstar says the most notable step in recent years was Vanguard's move to open its lowest-cost Admiral fund shares to a larger number of individual investors. For example, index funds that once required a minimum $100,000 to qualify for Admiral shares now require only $10,000.

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