Mutual Fund investing has had quite a run since 1987. According to the Investment Company Institute, the mutual fund industry’s national association, mutual funds held $5.5 Trillion in client assets at the end of 1998. These assets were held in over 7,300 mutual funds.
The growth the mutual fund industry continued to blossom through the turn of the century and at the end of 2007, individual U.S. clients held over $12 Trillion in mutual fund accounts, an incredibly large sum of money. These assets undoubtedly have placed strains on the industry as it has had to build the infrastructure necessary to oversee the proper accounting, client management, marketing, and sales operations associated with these funds.
The Investment Company Institute in its 2008 Investment Company Fact Book, (www.icifactbook.org), goes to great lengths to explain that the cost associated with mutual funds has been going down for some time. When discussing the downturn in fees the ICI uses a fabulous chart that reflects costs going back to 1980. This chart reflects how these costs have gone from 2.32% in 1980, to an average of 1.02% today. This is an astounding decrease and one that you might feel would be in line with the substantial increase in mutual fund dollars. Closer scrutiny of this chart reveals that since the turn of the millennium costs have gone down from 1.28% in 2000 to 1.02% in 2007, But wait…..the news from the ICI gets better. The ICI states that large mutual funds tend to have lower-than-average expense ratios because of economies of scale. The larger the dollars in the fund, the lower the fund cost to the investor. This should be great news for the investor, expenses are going down, economies of scale kick in, and less expense is taken from the asset base by the manager of the fund.
However, the comment by ICI with regards to economies of scale doesn’t work out the way you might think. At the end of 1999 the industry had $6.85 Trillion in mutual funds, by the end of 2007 this had ballooned to $12 trillion. So let’s do some math. If we use the $6.85 Trillion in assets at the end of 1999, with the 2000 expense ratio, per the ICI, of 1.28%, the industry took in over $87 Billion in fees in 2000. By the end of 2007, the fees from mutual funds delivered over $122 Billion in revenue to the industry for the 8,000 mutual funds. Total revenue for the industry rose a compounded average annual rate of 4.25% from 2000- 2007. Now let’s look at what was happening in the marketplace. The S & P 500 stood at 1469.25 on December 31st, 1999. On December 31st, 2007 the S & P 500 stood at 1468.36. During this 8 year period the S & P 500 was flat. Investors in equity funds tied to the S & P 500 or similar indices might not have seen substantial change in their investment dollars but the total fees raked in by the mutual fund companies increased nearly 40%.
Why is this important to our clients? If you are still investing in mutual funds we believe it is time to look at lower cost alternatives that can provide you diversification, tax advantages, and current market pricing. We believe that we can provide a service that will lower your overall cost of managing your portfolio through efficient management fee savings. Shouldn’t the fees that you pay to have your assets managed actually provide you added value not just the pockets of your mutual fund company?
By the way, the ICI goes on to say that at the end of October 2008 total mutual fund assets had fallen to $9.6 Trillion from $12 Trillion at the beginning of the year. How do you think the industry will recoup the lost revenue from the downturn in assets, lower fees?