Mutual fund boom bonus: Fees may climb more slowly

Mutual fund assets are on the rise and as a result, investor fees may not go up as much as analysts had expected, according to Chicago-based Morningstar Inc. Investors poured money back into funds in the first half of 2009 and that, coupled with market appreciation, has led to more assets for fund firms. With a larger asset base, the fee increases that are fueled by fixed service costs such as legal, audit, custodial, record-keeping, taxes and accounting, won't be as high because the fixed costs are spread over a large amount of assets, said Russel Kinnel, director of fund research at Morningstar. Specifically, he predicts that the average expense ratio may add 0.02 percentage points this year, down from an earlier prediction of 0.04 in April. “I think it's definitely looking less severe,” he said. “The [average expense ratio] is definitely trending higher this year. But it doesn't look as dire now as it did a few months ago. We may end up in the aggregate with a fairly small uptick in expenses.” Already in the first half, more than two-thirds of last year's outflows have been recovered. As of June 30, mutual funds took in an estimated $118.9 billion in net inflows. Last year, net outflows were $165.6, Morningstar reported. The average mutual fund lost 40% in the market downturn last year, the firm found. Even with growing assets, it's a challenge for firms to lower fees. “They are feeling tremendous pressure on profits,” Mr. Kinnel said. Smaller firms, with less than $1 billion in assets, may find it more challenging to lower fees because of their size, said Dan Sondhelm, a vice president and partner of SunStar Strategic, a financial marketing firm based in Alexandria, Va. Many investors will not learn about fee changes until next spring, when the fund firms publish their annual reports. Some firms, however, publish semi-annual reports in June and may update the fee information on their websites, Mr. Kinnel said.