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Fund Costs Said to Decrease Since 1980

Mutual fund costs have decreased over the past 19 years, even when particularly low-cost funds and large fund complexes which tend to have lower costs, are excluded in calculating the industry averages, according to the Investment Company Institute.

Equity fund costs decreased by 40 percent from 1980 to 1998, driven down by declining sales charges and investors' preferences for low-cost funds, the ICI said in a report the trade group made public Sept. 15. Expenses for bond and money market funds over the same 19-year period declined 29 percent and 24 percent respectively, according to the report.

Average costs for equity funds declined even after index funds, low-cost institutional funds and funds from the three largest fund complexes - Fidelity Investments of Boston, the Vanguard Group of Malvern, Pa. and American Funds of Los Angeles - were excluded from the calculations, the ICI reported. Fund costs decreased by 27 percent from 1980 through 1998 when those fund types and groups were excluded from the averages, according to the ICI.

"The decline (in costs) has been very broad-based," said Matthew Fink, president of the ICI, in a question-and-answer session with reporters.

Fink declined to predict whether the trend in decreasing costs would continue. Mutual fund firms face both downward pressures on costs from competition and upward pressures from demands for more shareholder services, he said.

The ICI report gives the fund industry additional data to support its claims that fund shareholders are seeing benefits in the form of decreased expenses as fund assets under management have grown. The fund industry is facing scrutiny over the issue of costs. Fund expenses were the subject of a Congressional hearing last September. Now, the U.S. Government Accounting Office is in the midst of a study assessing fund fees. It is expected to issue a report on its findings early this spring. The SEC is also reviewing mutual fund fees.

In February, Morningstar of Chicago, the fund tracking firm, suggested in a report that mutual fund fees had decreased only modestly in recent years, particularly in light of rising assets in the industry. (MFMN 3/1/99) The welcome news in the ICI report is that it shows that mutual fund sales charges are going down, said Scott Cooley, a senior analyst with Morningstar, last week. Some of the trend toward decreased fund costs should be attributed to investors who have migrated to no-load funds rather than to the actions of the fund industry, Cooley said.

"I don't think the industry should be credited for the fact that people are taking their financial future in their own hands," Cooley said.

Cooley had looked at the ICI report only briefly when he commented. Morningstar will probably study the ICI report and comment on it in the future, he said. Morningstar's February report took issue with aspects of earlier ICI assessments on trends in fees.

Investor behavior was playing a role in cutting costs both in last week's report and in the ICI's November, 1998 report, said Chris Wloszczyna, an ICI spokesperson. The reports note that investors are seeking out low cost funds, a fact which had helped decrease average costs, he said.

"We're just saying here's the trend and here's why," Wloszczyna said.

The ICI report also provided a close look at one-year changes in costs from 1997 to 1998. Shareholders paid less for their mutual fund investments in 1998 than they did the year before, according to the report. The cost of investing in equity mutual funds decreased by 5.6 percent in 1998, while the costs for bond and money market funds decreased by 3.5 percent and 2.3 percent respectively, the ICI said.

In 1998, the cost of owning an equity, bond and money market fund was 1.35 percent, 1.09 percent and 0.42 percent respectively, the ICI said.