Submitted By Trader Mark
Filed under adding insult to injury....
- As if the stock-market slide hasn't been painful enough, more mutual-fund firms are set to raise their fees in response to falling assets, a prospect that would leave shareholders with even less money in their battered accounts.
- 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. "It's a testament to the market environment that even a fund family [like Vanguard] that's been taking in new money has seen its assets decline so much that it has to raise its expense ratios," said Dan Culloton, associate director of fund analysis at Morningstar Inc.
- Vanguard said it had $84 billion in net inflows, or buying, across all its funds in 2008, and $25 billion in net inflows so far this year. But, according to Mr. Culloton, from the end of 2007 through the end of February, total assets under management fell to just below $1 trillion from $1.3 trillion. (which means despite people throwing money into Vanguard Funds, assets still dropped 25% due to the horrid market - just imagine what is going on in firms who are seeing net withdrawels) "You can make a big [deal] out of this, but Vanguard remains one of the cheapest outfits out there," said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter. "Is anyone surprised that as assets go down and expenses stay the same, that expense ratios go up?" That simple logic will likely drive higher fees across the industry.
- "Anecdotally, we are seeing expense ratios go up at other fund firms for similar reasons," Mr. Culloton said. At the end of 2008, American Funds stopped waiving 10% of its management fees, a practice it introduced in 2004. Spokesman Chuck Freadhoff said the firm made the move in response to "declining assets and continuing expenses." (I believe American is the largest fund family in the country by assets)
- Any increases at other money managers may be higher than at Vanguard, which is mutually owned and provides its services at cost. For publicly traded firms, or firms that use services such as transfer agents to generate profit, the pressure to enact more increases may be greater.
- Mutual-fund charges are based on a percentage of assets, but some of their costs -- such as customer-service centers and mailing out fund literature -- are fixed. After the plunge over the past year, which has seen the industry's total assets under management fall to $9.5 trillion from $12 trillion, increasing expense ratios is likely to be a viable option for many firms.
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