Morningstar Magazine - February/March 2015 - 40

Spotlight: Fees

The Ever-Shrinking Expense Ratio
What's behind the persistent trend
of declining mutual fund fees?

FUND FEES

Russel Kinnel

Fees are taking a smaller bite out of fund investors'
portfolio returns. For much of the past 25 years,
both average and asset-weighted expense
ratios have been declining. Granted, there are
some years where fees have jumped up. But
overall, the trend has been to charge investors less,
not more. The explanation? The trend is likely
due to several reasons such as a preference for
lower-cost funds, fund firms implementing fee
break points, and, finally, those same firms passing
along economies of scale.

classes. U.S. equity AUM grew about 9% to
$5.045 trillion in 2014. Assets managed in
allocation funds grew by 9%, too, while municipal-bond assets grew by 13%, alternatives
by 11%, and taxable bond by 5%. International
equity funds assets grew by a modest 2%, so fees
won't likely change much there. We'll publish
more on fund fees later this year once official 2014
data is available.
When we research fund expenses, we calculate
a figure for the average investor by assetweighting expense ratios, so that big funds count
more than small ones. We include all open-end
funds except for funds of funds.

Take 2013. That year, fees dropped courtesy of the
huge stock market rally. Market rallies cause
the fund industry's assets 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 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.

If we look at the average mutual fund instead of
the average investor, the trend is the same,
but at a higher cost. As of December 2013, which
is the date of the latest available information,
the average fund charged 1.25%, down from 1.28%
in 2012 and off from a peak of 1.47% in 2003.
The long-term trends are shown in EXHIBIT 1 .

Look for the trend to have continued in 2014
as assets have grown in most major asset

If we break the data down by fund group, we see
that most of the decline was in equities.

EXHIBIT 1

Downward Trend Since 1990, expense ratios for U.S. equity funds have fallen, especially on an asset-weighted basis.
All Funds Average

U.S. Equity Funds Average

All Funds Asset-Weighted

U.S. Equity Funds Asset-Weighted

Expense Ratio (%)
1.6

1.4
1.25
1.2

1.0

0.71

0.8

0.67
1990

1995

2000

2005

2010

2013

0.6

Asset-weighted and average expense ratios with annual flows and average assets; broad groups, excludes load-waive shares and fund of funds.
1990 of1991 1992 1993 1994 1995 1996 1997 1998 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Data as 12/31/2013
Source: Morningstar

Morningstar February/March 2015

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