The era of declining mutual fund expenses is over, and in fact, the cost of investing in a fund may soon be headed back up.
The era of declining mutual fund expenses is over, and in fact, the cost of investing in a fund may soon be headed back up.
The average asset-weighted expense ratio for investors in mutual funds last year was 0.9%, the same as it was in 2006, according to a report released last week by Morningstar Inc. Last year's plateau follows several years of steadily declining expense ratios, with the average cost of investing in a fund falling to 0.9% in 2006, from 1% in 2003, Morningstar said.
A fund's expense ratio is the percentage of assets deducted each year for fund expenses, including management fees, administrative fees, operating costs and other costs.
The decline is attributed mainly to the increased popularity of low-cost funds as a result of a less-than-stellar stock market. Investors are more likely to seek out inexpensive funds to offset the effects of a weak stock market.
Pressure to reduce costs also increased as a result of the mutual fund market-timing scandals of 2003. As part of their settlements with regulators, many fund companies were forced to lower their fees.
That in turn put pressure on fund companies not embroiled in the scandals to follow suit.
With many of those settlement agreements set to expire next year, it remains to be seen whether fund companies will raise their fees again.
"You may see some fees go up after that," said Russel Kinnel, director of fund research at Chicago-based Morningstar. "My guess is that only a minority of them will raise fees. Some of these are embedded in their fee structure. In order to raise the fee, they would have to get board approval. Then others probably put them in place as waivers. It's easier to let a waiver expire."
Geoff Bobroff, a Greenwich, R.I.-based fund consultant, agrees.
"I would expect the expense ratio to remain flat or go up a basis point over the next couple of years," he said.
The average asset-weighted expense ratio on U.S. stock funds decreased slightly in 2007 to 0.91%, compared with 0.92% in 2006, according to Morningstar.
On taxable-bond funds, the expense ratio fell to 0.77%, from 0.79%, Morningstar said.
The only category to experience a significant drop in fees was international funds. In that category, the average asset-weighted expense ratio fell to 1.04% in 2007, from 1.08% in 2006.
The drop no doubt is a reflection of the increased popularity of the international funds last year and the ensuing jump in assets that many of them experienced.
"The growth of assets has been the primary impetus for the decline in expenses," Mr. Bobroff said.
The average investor may not be focused on expenses, but advisers are, said Stephen Gorman, president at Gorman Financial Management of Hingham, Mass., which has $150 million in assets.
"The majority of mutual fund buyers probably don't look at that," he said. "They pay attention to the transaction cost right off the top. But I don't think they pay attention to annual expenses. In hard times, though, people look at this more."
Many investors recognize it's the cost of doing business, said Pat Hinds, a certified financial planner with Granite Financial Inc. of Saint Cloud, Minn., which has $96 million in assets. "If they don't want any expenses, then they would have to do their own research and work, and it would cost them a whole lot more than the mutual fund administrative costs," she said.
The down market tends to shine a light on what the expenses are, Ms. Hinds added.
"When you see negative returns, you may think, 'If I didn't have the expenses, I wouldn't be down so much,'" she said.
On April 1, Lord Abbett & Co. LLC of Jersey City, N.J., lowered the front-end sales charge on three of its short-term fixed-income mutual funds to 2.25%, from 3.25%.
The funds are the Floating Rate Fund (LFRAX), the Short Duration Income Fund (LALDX) and the Intermediate Tax-Free Fund (LISAX).
E-mail Sue Asci at sasci@investmentnews.com.
