Mutual Funds for the Utterly Confused

Fees have dropped - and as you might suspect in a post-downturn world. What investors need to concern themselves with now is the term “average”. Average will be touted as a way to attract investors and many actively managed funds will try to stay as close to what the markets consider average as possible.

Over the years, fees have dropped. This is due in large part to the proliferation of index funds that have cropped up in just the last five years. These funds have driven the average fee charged by a fund down almost a half of a percentage point - which can mean thousands of dollars that will be invested (or re-invested) rather than paid to fund managers.

The problem is that many of these funds that consider their portfolios as actively managed have charged relatively the same fees with little or no price breaks. There is good reason for this. Research and trading costs have become less expensive but the cost of satisfying shareholders - not the fund investors but the public companies that own the fund itself, have begun to demand better performance. The only way to do this is through increased fee structures.

What investors should be most wary of is actively managed funds trying to mimic index funds and garnering higher fees for the efforts. I think we will see much more of this as the markets try to recover and fund managers attempt to keep pace - and attract new investors.

But higher fees - at least in the arena called “fee expense ratios” - are on the way. Even for index funds. A recent Wall Street Journal article reported “The decision by low-cost stalwart Vanguard Group to raise expense ratios for many of its mutual funds is a clear sign to investors of a tough year ahead.” Expect fees to go from 0.2% to 0.5% - not earth shattering by any means but an increase that battered portfolios are not welcoming. Higher fees and lower overall performance point to less in the investor’s portfolio - indexed or not.

With “the industry’s total assets under management fall to $9.5 trillion from $12 trillion”, the increase in fees, used to cover operations is seen as the only way to recover some of the lost costs for maintaining the current investment structure. Keep in mind that in 2008, the industry average mutual-fund expense ratio was 1.19%. Some of you are paying much higher. And as a rule of thumb, much higher that 1.5% is too much to fork over no matter what the fund promises to return.

But help may be on the way. In the fall, the supreme court begins to hear oral arguments concerning the accusation that institutional investors received lower fees - substantially in some case - than individual investors. The case charges collusion was present as the board and fund manager made conscious decisions to do so. This may take the market out of this type of pricing.

For more info on which fund charges what, checkout this Zack’s Mutual Fund Screener.