The number of fund management fee breakpoints - the level of assets at which fees are reduced - increase as funds' total assets increase, according to a study released by Lipper of Summit, N.J. The study, Mutual Fund Management Fees-2000, a report on management fee structures, is the first of its kind, according to Lipper.

"The most important conclusion of the study is that business certainly supports the notion that economies of scale exist within the fund industry and that it's appropriate for mutual fund companies to pass those opportunities to shareholders," said Jeff Keil, vice president of portfolio evaluation, performance and board reporting for Lipper and one of the authors of the study.

The study is based on reviews of the fee structures of 5,800 funds of varying investment objectives and asset classes. Only classes with a front-end or no-loads were included. Any duplicate classes of a fund were excluded to ensure that one class per fund was included in the study. Also, because the study sought to examine characteristics of the industry as a whole, it does not identify specific funds and fund complexes.

"The primary focus of [the] study is to effectively identify where breakpoints currently exist in open-end portfolios' contractual management fee schedules," according to the study.

Under a breakpoint arrangement, management fees decrease as assets under management increase at designated breakpoints.

For example, if $500 million is a breakpoint, one fee, based on a percentage of assets, will be charged on the first $500 million, and a lesser percentage will be charged on the next portion of assets up to the subsequent breakpoint.

"The topic of breakpoints has not been readily exposed up until now," said Keil. "There haven't been benchmarks by which companies could measure what's appropriate in the industry."

Although the study focuses on breakpoint fees, six other fee structures are examined: all-inclusive, performance incentive, multiple-structured and flat-rate fees and fees by complex and by group. In addition, funds are classified into 13 investment types or asset classes.

While smaller funds have flat-rate fee schedules, funds with more assets tend to have more breakpoints, according to the study. The majority of funds with assets of $1 billion or more use breakpoints to lower fees and almost 90 percent of equity funds with assets of $10 billion or more have breakpoints, according to the study.

"Typically, smaller portfolios that have not reached a reasonable level of assets do not possess breakpoints since the need to recognize economies of scale has not yet occurred," according to the study.

The greatest opportunities for economies of scale exist between $1 billion and $3 billion, according to the report. At higher asset levels, fees begin to drop more slowly as opportunities for economies of scale decrease.

New funds' management fee schedules generally start at higher levels than those of older funds because of the increased costs of opening a fund, according to the study. Many new funds have higher fees at lower asset levels, but integrate more breakpoints into the management fee structure, than do older funds.

"In general, older funds need fewer breakpoints to reach the same actual management fee as newer funds when higher asset levels are achieved," according to the study. "This difference in structure between newer and older funds indicates either fee structure modifications occur with asset growth, or many older funds have retained fee structures implemented early in their lives."

While the study shows some consistent trends within fee structures throughout the industry, there are differences among some asset classes. Equity, small-cap, multi-cap and world income funds are, in general, the only funds that incorporate breakpoints below the $500 million asset level, according to the report. Municipal debt and retail money market funds are the only two categories in which breakpoints are commonly used at all asset levels, while institutional money market funds usually do not establish breakpoints at any asset level.

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