Morningstar: Fund fees continue to fall

The reductions in fees are modest but continual

Feb 21, 2018 @ 1:46 pm

By John Waggoner

Fees on actively managed mutual funds are falling, but the funds are still about as popular with investors as flat beer.

Morningstar Inc. found that median expense ratios for diversified domestic stock funds and exchange-traded funds have fallen since the first quarter of 2017. Over the past six months, expense ratios for all nine Morningstar style-box categories of actively managed funds have declined, particularly in mid-cap and large-cap growth categories, where the median expense ratio fell by three basis points.

The decline in expense ratios for actively managed funds, while small, is striking because investors have largely shunned actively managed funds. For example, actively managed U.S. diversified stock funds saw an estimated $24.1 billion walk out the door in January, compared with a $7.3 billion inflow for passively managed funds.

One reason for the decline, of course, is competition from passive funds and ETFs, which charge far less than their actively managed counterparts. The median passively managed large-company growth fund or ETF charges 0.46%, for example, compared with 1.00% for actively managed large-company growth funds and ETFs. Investors, and particularly advisers, have learned that low-priced funds have an edge over higher-priced ones.

"It's a continuing story: Fee compression," said Steve Janachowski, CEO of Brouwer and Janachowski. "It's similar to what happened in the custodian business: There's such scrutiny to be competitive that everyone is dropping their prices."

The scrutiny is coming in part from regulators, but also from advisers and retirement plan administrators, Mr. Janachowski said. "Fiduciaries are cost-conscious," he said.

Other forces are at play, too, however. For one thing, technology has driven down the cost of administering mutual funds, enabling fund companies to pass some of those savings on to investors. Investors can buy a fund directly on the internet and download prospectuses. The days of processing checks and sending out reams of documents aren't over, but they have diminished: Investors can do much of the work of investing online.

"Technology has also enabled investors to find the cheapest funds, which encourages funds not to stand out as being too expensive," said Todd Rosenbluth, senior director of ETF and mutual fund research for CFRA.

Fund managers, too, are reaping some of the cost savings provided by technology. Active managers can use quantitative strategies to find suitable stocks for their portfolios. "They don't need analysts traveling the world to find hidden stock gems," Mr. Rosenbluth said.

Fees on passive funds were more of a mixed bag: Large-cap strategies all posted median expense decreases, but mid-cap categories chalked up median expense increases, while small-cap expenses stayed put, Morningstar said. One possible reason: Companies aren't quite as inclined to slash expenses when they're enjoying net inflows, Mr. Rosenbluth said.

Overall, however, the fee cuts are good for investors — and for active funds as well, Mr. Rosenbluth said. "It's encouraging to see that the funds are becoming a bit more aggressive in cutting fees. We believe there are good active funds out there, and in many cases, the good ones cost less. The cheaper the product, more likely they are to outperform."

(More: Active TDF managers push to compete on fees)

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