Yield of Dreams

How Low Can You Go? Mutual Fund Fees Come Down in 2011

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For the last year, retail investors have been retreating from U.S. equity mutual funds like no other, redeeming $121 billion from these funds in the last year. But there is one bright spot in talking to clients about mutual fund investing: Fees are coming down.

According to Morningstar, the average mutual fund expense ratio was 0.75 percent in 2011, down from 0.77 percent in 2010. Domestic equity fund fees were even lower, averaging 74 basis points in 2011, from 78 basis points a year earlier.

The Investment Company Institute also released a report today on mutual fund fees, reporting similar data. The ICI said equity funds averaged 0.79 percent in expense ratios in 2011, down from 0.83 percent in 2010. Meanwhile, bond fund fees were down 2 basis points to 0.62 percent.

Often one of advisors’ biggest gripes about actively managed mutual funds has been that performance isn’t worth their high fees. If you’re not going to get alpha, might as well invest with a low-cost index fund or ETF. (Of course, that’s a good strategy. We’ve written time and time again that active management’s a zero sum game.)  

But perhaps the reports out today show that argument doesn’t hold water. Mutual fund companies seem to be adjusting the way they do business to meet the demands for low-cost investment options.  

Russel Kinnel, director of mutual fund research at Morningstar, said fees are coming down because investors are buying lower cost funds, simple as that. But there are several reasons they’re buying low—they’re aware of fees, they follow performance which is related to fees, they’re buying bond funds, and they’re buying index funds. Morningstar’s data includes index funds, but not ETFs.

Kinnel also found the drop in equity fund fees surprising given the significant redemptions. Here’s how he sees it:

A strong stock market in 2010 meant asset bases were significantly greater in fiscal 2011 (which ends in October) despite the outflows than in fiscal 2010. Expense ratios reflect the average of fees paid over the course of the entire fiscal year rather than just the level charged at the end of the period.

So which funds had the greatest roll-backs in fees? According to Morningstar, Wasatch Ultra Growth (WAMCX) dropped its fee from 1.68 percent to 1.42 percent in 2011, while fees on the Artisan Value Fund (ARTLX) fell to 1.09 percent in 2011 from 1.27 percent in 2010.

Do I smell another mutual fund fee war coming on?

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Casting a gimlet-eye on asset management issues.

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