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Mutual Fund Expense Ratios See Biggest Spike Since 2000

Which funds had the biggest cuts and increases in expense ratios?

Russel Kinnel, 04/22/2010

The average fund investor paid more for his or her fund management in 2009 than in 2008. Overall, the average fund investor paid an expense ratio of 0.887% compared with 0.874% in 2008. It's the largest jump in fees since 2000. Those figures are for open-end mutual funds exclusive of exchange-traded-funds. You can see the details here.

The market's swoon was largely responsible. Official 2009 expense ratios largely cover a period from Nov. 1, 2008, through Oct. 31, 2009. The market hit bottom in early March 2009, and that reduced fund asset levels significantly. Most funds have breakpoints embedded that reduce management fees as assets rise and raise them as assets shrink. So, it's no surprise that expense ratios popped. In fact, when I wrote about 2008 expense ratios last year, I said that 2009 expense ratios were likely to increase.

The good news is that the market's tremendous rebound is already leading to lower expense ratios for fiscal 2010. We won't have the data until a year from now, but I would guess that 2010 expense ratios were close to in line with those of 2008. In fact, if you compare fund semiannual reports from last summer with annual reports printed in the last quarter, you can already see the trend to lower fees.

To arrive at figures for the average investor, we asset weight expense ratios. After all, the fees charged by the $162 billion American Funds Growth Fund of America AGTHX matter to investors much more than $22 million W.P. Stewart & Co. Growth WPSGX. We excluded institutional share classes, qualified access funds, and funds of funds.

Fees by Asset Class
Looking at fees by asset class, we see some dramatic shifts. Balanced funds saw a spike of 7 basis points to 0.88%, and alternative funds (such as long-short and commodities funds) also popped 7 basis points to 1.48%. International equity funds' expense ratios rose 6 basis points to 1.10%. Municipal bond funds' expense ratios rose 4 basis points to 0.76%. U.S. equity funds' expense ratios rose 2 basis points to 0.90%.PAGEBREAK

Only taxable bond funds saw a cut in expenses. There, the average investor's bill shrank 2 basis points to 0.72% thanks to much smaller losses in 2008 and strong inflows.

Flows Will Matter Again
Usually we attribute most of the changes in fees to inflows and outflows. However, when you have giant market moves, the impact of flows is just a drop in the ocean. Should the market settle down, flows will come back into focus.

At the moment, bond funds continue to be a big draw, and domestic equity funds had been in net redemptions. However, many U.S. equity funds now boast huge trailing 12-month returns, and that has already led to the first positive month of inflows in March. If this trend continues, it will be another tailwind for lower fees.

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