The cost of equity and bond mutual funds reached a low in 2015 following fee reductions over the past two decades, according to research from the Investment Company Institute (ICI), a US investment management industry association. The success of the exchange-traded funds, with their low fees, is a likely significant factor behind the decline.
The data reflects the changes in asset-weighted average total expense ratios of equity, hybrid, bond and money market mutual funds since 1996. The study finds that all four categories exhibit a downward trajectory for expense ratios; equity funds decreased from 104bps in 1996 to 68bps in 2015; hybrid funds from 95bps to 77bps; bond funds from 84bps to 54bps; and money market funds from 52bps to 13bps. (See diagram below)
Sean Collins, ICI’s senior director of industry and financial analysis, said in a statement: “Mutual fund expense ratios have been experiencing an overall decline for many years, driven by increased competition and growth in the fund industry. Expense ratios for both actively managed and index funds have seen substantial declines.”
Equity fund expense ratios fell 2bps during 2015, following a 4bps decline in 2014 and marking the sixth straight year in which they have trended downwards. Actively managed equity fund assets fell by $275bn in 2015, while index equity fund assets rose by $109bn, highlighting the cannibalization of mutual fund demand by passive products. As a cost-efficient means of accessing a passive investment exposure, demand for ETFs has benefited significantly from this developing trend.
Bond fund expense ratios fell 3bps over 2015, in large measure reflecting a decline in the assets of high-yield bond funds, which tend to have higher-than-average expense ratios. Performance of high-yield bonds suffered in 2015, pushing down the value of funds’ holdings and prompting investor redemptions.
The average expense ratio of hybrid mutual funds, which invest in a mix of equities and bonds, fell 1bp over 2015. Hybrid fund assets have actually increased in recent years, driven by “alternative strategy” funds (those investing in a wider range of asset classes including real estate and commodities), which now account for 8% of the assets of all hybrid funds.
Money market fund expense ratios were unchanged from 2014. The current low interest rate environment has limited the expense ratios of money market funds over the last few years, as these funds have waived portions of their fees to prevent their net yields falling below zero. In 2015, 98% of money market fund share classes waived at least some portion of their fees.
Expense ratios of index funds have also seen declines but have levelled out in the past two years. The ICI writes in a statement: “The declining cost of actively managed funds was due in large part to competitive pressures and investor interest in lower-cost funds. For both actively managed and index funds, this demand for lower-cost funds is evidenced by the concentration of assets in the very lowest cost funds. In 2015, 57% of the assets of actively managed equity funds were held in the 10% of such funds with the lowest expense ratios. In 2015, 69% of index equity fund assets were held in the 10% of index equity funds with the lowest expense ratios.”
Recent research from S&P Dow Jones showed that a majority of active equity funds in Europe were unable to beat their benchmark over a 10-year period. This lends further support to the notion that despite decreasing fees in active mutual funds, low cost passive products such as ETFs provide better value for money.