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Funds May Be Cutting Back, But Overall Costs Flat


Mutual funds may have wielded the ax heavily on the people and technology to drive costs down, since the credit crisis erupted three years ago.

But the overall cost of running their books of business has not been slowed, according to research consultancy Barrington Partners in Boston.

"Fund accounting has a lot of fixed costs," said Hubbard R. Garber, managing director of Barrington Partners. "You've got so many portfolios, you've got so many people to do it, you've got technology, you've got all these systems. A lot of these costs are not that variable."

The cost of accounting for their books of business amounts this year to 1.34 basis points on each dollar of assets they manage, according to Barrington's 2011 Fund Accounting Cost Survey, released in late September.

Two years ago, as cost-cutting began, the cost of accounting amounted to 1.37 basis points. The biennial survey was last conducted in 2009.

For a mutual fund company with $100 billion of assets under management, that 1.34 basis points amounts to $13.4 million of annual expense that is applied to all aspects of fund accounting, from calculating net asset values, to preparing taxes, to legal administration to general fund administration.

Which means the cost of accounting has gone down, slightly: about $200,000 a year in the last two years for that representative $100 billion AUM fund.

That would, in turn, mean that the cost per year of accounting for their operations has gone up less than $1 million, for the kind of firm surveyed by Barrington.

The 13 participants in the 2011 survey represent $5.7 trillion in assets under management or 44% of mutual fund industry assets in the United States.

On average, that translates to $438.5 million of assets under management by the fund companies surveyed.

The costs are affected by the complexity of the securities held by each fund, the amount of automation each fund employs, the amount of staff in-house as well as the number of people outsourced.

Of the companies surveyed, for instance, 10 handled their accounting with in-house staff, Barrington Partner Ellen Pedro noted. The other three outsourced their accounting.

In theory, the cost of accounting should go up, Pedro said, if the assets under management are more complex. In effect, if the fund holds more futures, options, asset-backed securities and other derivatives, their cost of accounting should go up.

But the difference due to complexity, at least in the past two years, is negligible.

"The people who have more complex books, do we find that their [accounting is] more expensive?," Pedro said. "There's not a lot of variation."

Interestingly, by Barrington's own measures, complexity of funds has actually gone down in the past two years, from a rating of 1.488 per fund surveyed to 1.429. A rating of 1 is simple, a rating of 4 is given a most complex set of holdings.

In general, fund companies had expected costs to go down because there's been a lot of cost-cutting since in the past two years, Garber said.

But coming up in the same duration is a lot of new regulation, he said, which could well account for the overall cost of fund accounting basically treading water in that time.

In addition, the holdings of smaller players "are getting more diverse," she said. Meaning: The complexity of assets in small funds can be as complex as those held by large funds.

A working assumption, based on the marketing efforts, might indicate that the holdings of funds are getting more complex because of investment in shares or securities involving foreign companies or commodities.

But the Barrington survey found that the internationalization of funds is static. Eighty percent of the funds' holdings in 2011 were in North American assets-the same number as in 2009.

So did internationalization take root?

"Apparently not," Pedro said.

What could account for keeping the cost of accounting essentially flat, despite general cost-cutting by mutual fund and ETF companies, is ... staffing. How many portfolios a given accountant now can handle.

In 2009, a single fund accountant was counted on to administer the net asset values and other factors involving 1.9 portfolios.

In 2006, each accountant only handled 1.6 portfolios each.

This, Garber said, "is an indication of how cost is going up," and could be laid at the feet of dealing with new regulation, the diversity of instruments, or both.

The good news: The accuracy of calculating the net value of assets is almost unaffected. The accuracy rate in 2009 was 99.77% of asset valuations conducted. In 2011, 99.73%.

The biggest amount of errors, though, did occur in pricing securities, Garber said. But this didn't usually result from inaccurate prices coming in from a data feed. More likely, in most cases, data would simply get entered wrong, in the processing of asset values.

"Security pricing errors are still the most frequent" source of error, in fund accounting, Pedro said.

Overall, coming up with net asset values accounts for 57% of the cost of accounting in funds, in 2011. Tax processing is 7.5%, data feeds 8.9%, legal administration 9.2% and general fund administration 21.9%.

And who makes the most at it? Guess.

The average base salary, with no benefits, for a worker employed in calculating net asset values is $50.730.

The average for a worker involved in general fund administration is $59,000.

In tax preparation, it's $64,00.

In legal administration ... $93,000.