Fund firms have earned more in fees than investors have gained from the funds themselves in recent years, and investors may choose to invest, instead, in low-fee, exchange-traded funds as an alternative, according to a recent report by FundExpenses.com.
"The benefits that funds used to offer are no longer valid," said Max Rottersman, author of the report, adding that investors can achieve diversification via exchange-traded funds. He also noted that investing in individual stocks may become more appealing since brokerage fees have dropped from several hundred dollars to well below $100 at some discount brokerages.
Further supporting his theory of the increased indifference to the fund industry, the report showed a mere $14 billion in net new sales throughout the whole of 2001. Last year, equity mutual funds lost $10 billion, although due to a record $130 billion into bond funds, mutual funds of all types wound up with a net $72 billion (see MFMN 1/21/03).
After 1997, investors who sent $640 billion into equity funds made 4.5% on their money, or $29 billion, at best. Meanwhile, the funds earned $90 billion in that period from all assets managed. While the equity markets are still slumping, equity funds have taken in $47 billion in advisory fees from September 2000 through November 2002.
The report argues that while advisors pocketed a lot of money in high-bulk market assets, 40 basis points may not seem like a lot during a bull market, but it is magnified against investors asset losses during this prolonged bear market. Additionally, the report notes that funds earned $60 billion in advisory fees from 1998 to the end of 2002, while new investors pumped $303 billion in and actually lost money.
Investors in equity funds have not realized a return on their investment in five years of professional money management, according to the study. Since the beginning of 1998, the industry, which had $2.5 trillion in equity funds at the time, has taken in about $90 billion in advisory fees and has had $190 billion in total expenses. This translates into a 1.2% expense ratio, which means that, if an investor bought an equity fund at the end of 1997 and that fund had a negative return, the investor also suffered a 6% loss from the fund expenses alone.