Fund Declines Lead To Fee Increase in 2002

March 25, 2003 ( - The average annual expense ratio of US mutual funds rose from 1.24% in 2001 to 1.26% last year.

The rise in expense ratios, which includes fees for portfolio management and administrative costs, comes as assets in open-end mutual funds fell 7.6% to $5.88 trillion in 2002.   In fact, expense ratios have increased due to the decrease in average net assets, according to research by Lipper Inc.

The bearish stock market conditions last year – stock funds last year lost about 20.8% of their value – shrank the asset base for the fund industry. That resulted in higher expenses for investors because they no longer benefited from fee break points generated from increasing fund assets.

One factor pointed to was the collapse of technology stocks, which continued to hit almost all types of diversified US stock funds in 2002, including value and small-company funds that are not generally considered tech-driven.   Evidence of this is s mall-cap value funds, which suffered a relatively modest 10.32% decline. However, technology investments accounted for approximately 2.5% of negative return for these funds.

Further, the current rough market environment raises the likelihood of more consolidation in the fund industry. Particularly vulnerable are what Lipper refers to as “boutique fund shops,” typically those fund companies with a niche focus.   As these smaller firms become increasingly cash-strapped, they will be pressured to combine with larger, more cash heavy competitors that need their expertise.