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Fund Spy

Putting Mutual Fund Fees in Context

Our new data point gives investors a quick review on how their funds' fees stack up.

Costs matter in selecting funds. But viewing a fund's fees without context is a fruitless exercise. Is a 1.00% expense ratio high or low? As my tax professor once quipped, many of the best questions can be answered with, "It depends." With fund fees, it depends on the asset class and the level of services provided. For example, a 1.00% fee is competitive among foreign small-cap stock funds purchased with the assistance of a broker, but the same fee is questionable for an institutional large-cap offering.

Morningstar's new Fee Level scoring gives investors the context needed to compare a fund's share class-level fees. Research shows that a fund's fee level is one of the better predictors of future relative performance. With the Morningstar Fee Level, users quickly gain insight into a fund's relative level of fees compared with funds that have both a similar asset-class focus and distribution characteristics. The Morningstar Fee Level is a good first step evaluating fees after an investor has determined the asset class and distribution channel he wishes to use.

How It Works
This new tool doesn't dictate an arbitrary fee analysis across all funds and categories, but rather highlights the relative fee level within classes in five gradations.

In some cases, Morningstar categories have been combined into broader comparison groups of similar asset types. For example the large-value, large-blend, and large-growth categories are combined in a large-cap comparison group, as the market profile and liquidity of these segments are relatively similar. It isn't more or less costly to invest in one area of the large-cap market.

Within those comparison groups, fund share classes are divided into five distribution classes based on their investment minimums, load structures, and distribution fee profiles. The five classes are no load, front load, deferred load, level load, and institutional. As a result, example comparison groups would be:

  • Large-Cap No Load
  • Large-Cap Front Load
  • Large-Cap Deferred Load
  • Large-Cap Level Load
  • Large-Cap Institutional

Within each distribution class, a fund's annual report net expense ratio (prospectus net expense ratio is used for target-date funds to capture underlying fund fees) is ranked against its peers using five quintiles. Each quintile corresponds to one of the following scores:

  • Low Cheapest quintile
  • -Avg Second-cheapest quintile
  • Avg Middle quintile
  • +Avg Second most expensive quintile
  • High Most expensive quintile

The methodology originated in Morningstar's Stewardship Grade for funds. We have leveraged the fee analysis done there across virtually all mutual fund share classes.

How to Use It
The comparison groups (detailed below) provide a strong starting point for investors building portfolios and are especially helpful for asset-allocation decisions. The fee level also provides added insight because share classes are judged on a like-distribution or "apples to apples" basis.

Morningstar refines its categories and methodologies based on changing industry dynamics to provide the most relevant analysis to help investors. Adding much-needed context to the study of fees will help investors make better decisions. Click here to see the methodology of the Fee Level calculation.

Comparison Groups

  • Aggressive Allocation
  • Bank Loan
  • Bear Market
  • Conservative Allocation
  • Convertibles
  • Diversified Emerging Markets + Pacific/Asia ex-Japan + Latin America Stock + China Region
  • Diversified Pacific/Asia + Japan Stock
  • Emerging Markets Bond
  • Europe Stock
  • Foreign Large Value + Foreign Large Blend + Foreign Large Growth
  • Foreign Small/Mid-Value + Foreign Small/Mid-Growth
  • High-Yield Bond
  • High-Yield Municipal
  • Inflation Protected
  • Intermediate-Term Bond
  • Large Growth + Large Blend + Large Value
  • Long-Term Bond
  • Long Government + Intermediate Government + Short Government
  • Long-Short + Market Neutral
  • Mid-Growth + Mid-Blend + Mid-Value
  • Moderate Allocation
  • Multisector Bond
  • Municipal MA + Municipal MN + Municipal NJ + Municipal OH + Municipal PA
  • Municipal National Intermediate + Municipal Single State Intermediate + Municipal CA Int/Sht + Municipal NY Int/Sht
  • Municipal National Long + Municipal Single State Long + Municipal CA Long + Municipal NY Long
  • Municipal National Short
  • Retirement Income
  • Short-Term Bond
  • Small Growth + Small Blend + Small Value
  • Communications + Financials + Health Care + Miscellaneous Sector + Natural Resources + Precious Metals + Real Estate + Technology + Utilities + Global Real Estate + Equity Energy + Industrials
  • Target Retirement 2000�2010
  • Target Retirement 2011�2015
  • Target Retirement 2016�2020
  • Target Retirement 2020�2025
  • Target Retirement 2026�2030
  • Target Retirement 2031�2035
  • Target Retirement 2036�2040
  • Target Retirement 2041�2045
  • Target Retirement 2050 +
  • Ultrashort Bond
  • World Allocation
  • World Bond
  • World Stock

 

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