NEW YORK - The cost of investing in bond mutual funds decreased by 25 percent and the cost of investing in money market mutual funds dropped 15 percent between 1980 and 1997, according to a study the Investment Company Institute (ICI) released last Tuesday.
This reinforces comparable data on equity mutual funds which the ICI, the fund industry's major trade organization, issued last November. That data showed a 33 percent decrease in the cost of investing in those instruments between 1980 and 1997 (MFMN, November 13, 1998).
ICI's data indicated the average cost of investing in a bond fund dropped from 1.54 percent of every dollar invested in 1980, to 1.16 percent in 1997; the cost of investing in a money market mutual fund declined from 0.54 percent in 1980, to 0.46 percent in 1997; and the cost of investing in an stock fund plummeted from 2.25 percent of every dollar, to 1.49 percent, during the 18-year span.
ICI based its figures on all major fees, expenses and sales charges- but not management fees.
Matthew Fink, ICI president, called this a fair analysis, since it includes sales-load figures and, "is comparable to the fee information required by the Securities and Exchange Commission in every mutual fund prospectus." Fink called these disclosure requirements "unmatched by that of any similar financial product."
However, some industry observers believe ICI's data is misleading because it does not include management fees, which these observers say, have been steadily increasing in the past few years.
As if anticipating this argument, Fink touched on this subject by immediately following his disclosure of ICI's data with a lengthy discussion on "economies of scale." Fink painstakingly noted how larger, established funds enjoy "rationalizations" of operating costs, and said such firms typically can reduce their management fees.
Fink acknowledged that the hundreds of mutual fund start-ups which have entered the business since 1990 bear the weight of steep operating expenses- including management fees- in their early years. However, investors are beginning to prove they simply will not tolerate high management fees from larger, established funds, he said. In fact, many such funds, "have implemented . . . automatic fee reduction policies and share economies of scale' with the funds' shareholders," he said.
Fink also said that ICI data proves that funds which have grown the fastest in the past two decades have also made the largest reductions in their operating expenses.
John Brennan, ICI chairman and chief executive officer of The Vanguard Group, also addressed ICI's "1999 Outlook for Mutual Funds" press conference. The runaway profits which mutual funds have enjoyed in the past few years can not continue unabated, he said. And, when returns inevitably slow down, it will be imperative for fund managers to educate shareholders and broker/dealers about realistic expectations.
"While we in the industry expect lower returns than in recent years, many investors believe the good times will continue to roll," said Brennan.
"This is a cause of great concern to the industry," and can only be countered through education, he said.