Fund expenses don't hurt returns, study finds

Mutual fund fees have no effect on shareholder returns, according to research from D. Bruce Johnsen, a professor at George Mason University School of Law. When a fund lowers its fee, the primary effect is to increase the size of the fund, he said in an interview last week. An increase in a fund's size, however, leads to an increase in the fund's overall costs, Mr. Johnsen said. “This is not only because administrative costs are likely to increase at an increasing rate in total assets [owing in part to the cost of processing additional accounts] but also because large funds face higher transaction costs [from] trading portfolio securities, and these costs should also increase at an increasing rate in total assets,” he wrote in a paper, “Myths About Mutual Fund Fees: Economic Insights on Jones v. Harris,” which was published last month. That is something that the U.S. Supreme Court should keep in mind next month when it is scheduled to debate the standards used to determine when a mutual fund's fees become excessive, Mr. Johnsen said. Not everyone, however, agrees with his theory. “It's very well-proven that expenses do matter in terms of funds' returns,” said Russel Kinnel, director of mutual fund research at Morningstar Inc. E-mail David Hoffman at dhoffman@investmentnews.com.