As mutual funds lose value, many see hikes in fees
NEW YORK — Double the disappointment for most mutual-fund investors: Not only has performance tanked across most stock sectors, but fund fees are heading up.
Investors with $5,000 in stock funds now pay an average of about $72.50 annually in total charges.
But for some smaller investors that amount is gradually climbing toward $85 or even $100, depending on the fund group and the portfolio amount, according to recent analysis by information firm Lipper Inc.
Here's why: At most mutual funds, management fees are based on the total amount of assets in a fund. As the value of the fund rises, the fee is assessed at a lower rate. But as the fund shrinks - because of falling market value or as investors shift into other investments - a higher rate is assessed.
"The management-fee increases have only begun, and so most investors probably don't even realize what is happening yet," says Jeff Keil, vice president of Lipper's global fiduciary review group in Denver. "But we expect the increases to become larger and more evident in the months ahead."
Interestingly, there is no across-the-board evidence that fund managers are taking significant cuts in pay despite the market's decline, Mr. Keil says. Currently, junior managers earn upwards of $100,000 annually, and superstars are paid well into the millions, he says.
One reason managers remain in the money: Many mutual funds use "relative performance" as the model for managerial success. Even when a fund sags, Keils says its manager is considered a winner if the funds shrinks less than the market index it is linked to - such as the Standard & Poor's 500 index.
Another fee kicking small investors when they are down: minimum account charges. Shrinking stock values have pushed assets in many accounts below minimum-balance requirements.
At Fidelity, for example, account-holders must pay an annual service fee of $12 if their fund balance falls below $2,000.
At some funds, the penalty is even higher. At American Century, A fee of $12.50 is levied twice a year if your assets fall under $10,000.
"We're not talking about a huge increase in total fees," says Keil. "They add up to small incremental amounts. But when market returns are low, as they are now, those higher fees can very quickly cut into your earnings."
Investors who have small amounts in several funds can avoid minimum-account charges by consolidating into one fund, experts say.
But some fees can't be avoided. Investors must pay administrative fees to cover the daily operations of the fund, as well as 12(b)1 fees, which pay for fund advertising and distribution. By law, a 12(b)1 fee can be no higher than 1 percent a year. Legal and auditing fees are sometimes separate, but are often included in the administrative fee.
Typically, the expense ratio of an equity fund is about 1.45 percent of total assets, Keil says. But now, with less assets left to cover fund costs, expenses are creeping toward 1.46 or 1.47 percent.
These ratios are often greater in some categories of funds than in others. Technology and telecommunications funds, for example, often charge larger fees given their sagging returns, heavy withdrawals, and the costs associated with more complex portfolio analyses.
One set of fees not included in the fund's expense ratio, but paid by investors: the brokerage charges incurred as a fund buys and sells different securities. These costs are listed on a distinct line in a fund's annual report.
Investors with load funds also pay the broker who sells them the fund product. This load is either paid up front, over time, or when investors sell their shares.
But rising fees aren't only problematic for equity funds. Money-market funds, for example, pressed down by last week's half-point interest-rate cut by the Federal Reserve, have seen expenses eat up paltry yields.
• To check out how expensive the costs are on any funds that you own - or compare them with competitors - click on www.LipperLeaders.com.