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    As rates have failed to rise as expected, investors have warmed back up to core bond funds , says Morningstar's Mike Rawson.

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Fund Fees Are Dropping

In Part One of a three-part series, Morningstar's Russ Kinnel details how last year's market rally led to a decline in expense ratios, allowing for cheaper funds.

Russel Kinnel, 05/15/2014

Fund fees dropped in 2013 courtesy of the huge stock market rally that year. Market rallies cause the total assets under management of the fund industry to grow tremendously and that in turn triggers breakpoints in mutual fund management fees. Those breakpoints are built into a fund's fee structure so a fund charges less for each additional dollar managed over various AUM thresholds.

The industry also shares some other efficiencies from the greater economies of scale, though they of course keep quite a bit to themselves.

The average investor in open-end mutual funds paid 0.71% in expenses in 2013 versus 0.72% in 2012 and 0.78% in 2010. The figure has gradually come down from a peak of 0.95% in 2000.

We calculate a figure for the average investor by asset-weighting expense ratios so that big funds count more than small ones. We include all open-end funds except for funds of funds.

If we look at the average mutual fund instead of the average investor, the trend is the same but at higher cost. Today the average fund charges 1.25%, down from 1.28% in 2012 and off from a peak of 1.47% in 2003.

You can see the long-term trends in this graph.



If we break the data down by fund group, we see that most of the decline was in equities. The typical investor in U.S. stock funds paid 0.67% in 2013, down from 0.70% in 2012. The average investor in foreign equities paid 0.78% versus 0.80%. The typical sector fund investor paid 0.90% versus 0.92%.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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