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Fund Research & Insights

Survey Suggests Little Pressure on Fund Costs

We recently asked managers about fee trends at their funds. The results are not encouraging.

Christopher J. Traulsen, CFA 22 December, 2006 | 5:40PM
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Our latest European Fund Trends Survey shows that there are few factors putting significant downward pressure on fund expenses, and that respondents’ fees have generally risen over the past five years.

In the survey, which was dominated by fund shops from continental Europe, the median fund manager reported that the average total expense ratio for its retail equity and balanced funds was 1.59%. On an asset-weighted basis, the figure weighed in at 1.25%. The majority of fund companies also said the trend at their funds was for fees to increase rather than decrease. Sixty-six percent of respondents said the equal-weighted average total expense ratio (TER) of their retail equity and balanced funds had increased over the past five years, and 60% of respondents indicated the ass

et-weighted total expense ratio of their funds had increased over the same period.

We also asked fund companies to rate six different factors by the amount of downward pressure each had put on their funds’ total expense ratios. These responses were also telling. Respondents were asked to rate each factor on a 1 to 5 scale, with 1 being “not a factor” and 5 being “crucial”. No factor received more than a two rating on average, which was described on the survey as “not very much pressure.”

What It Means for Investors
 The survey data suggest there is little in the way of price competition among retail equity funds in Europe. This is supported by the situation in the UK, where an astonishing number of funds have standardized on 1.5% as the annual management charge for their retail equity funds. Of the 1600+ retail UK-domiciled equity fund classes tracked by Morningstar, 64% have an annual management charge of 1.5%, and prominent fund shops such as Henderson Global Investors and M&G were able to boost their management fees in the last year with little apparent detrimental effect on asset flows into their funds.

For investors, this means that the fees they are paying are likely higher than they would be were the market for investment services truly competitive. Since expenses directly affect fund returns, we believe investors’ performance, and thus their ability to save for retirement is being needlessly penalized.

12-Month Outlook
 Fund managers who responded to the survey were reasonably optimistic for the coming year, with 64% expecting global equities to appreciate by 6 to 10% over the coming year. On the whole, they continue to believe large-caps are due to outperform small caps, with 84% of respondents stating that large-caps would outperform over the next 12 months. They remained cautious with regard to interest-rate risk, however, with 76% saying they thought short-duration issues would outperform long-duration issues over the next 12 months.

To read the latest European Fund Trends Survey in its entirety, please click here.
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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.

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