(PUB) Investing 2015

Morningstar FundInvestor

May 2015

15

investor interest under Jonathan Coleman. For us, though, Coleman’s complete record isn’t sufficiently convincing, and we give the funds Morningstar Analyst Ratings of x . Declining Fees but Surging Revenues for Fund Industry Asset management is often described as a scalable business. After all, the costs of managing a fund don’t significantly increase when a fund goes from $1 billion to $2 billion in assets. In fact, funds spread their costs over more assets as funds grow, often leading to declines in expense ratios as assets increase. Indeed, during the past decade, the asset-weighted expense ratio across all funds (including mutual funds and exchange-traded products, or ETP s, but excluding money market funds and funds of funds) has fallen to 0 . 64% from 0 . 87% , which is a decline of 27% . Yet, in that same span, industry assets under management have increased 143% . We can estimate industry fee revenue by multiplying the asset- weighted expense ratio by total assets under management. By this measure, industry fee revenue is at an all-time high, reaching $88 billion, up from $50 billion 10 years ago. That is an increase of 78% . Thus, a much larger share of the benefits of the increase in assets under management have stayed with the fund industry rather than being returned to fund shareholders. The asset-weighted expense ratio for all funds fell to 0 . 64% in 2014 from 0 . 76% in 2009 , a decline of 15% . However, during this span, just 63% of the fund share classes and ETP s that existed in both 2009 and 2014 reduced their expense ratios and only about 24% of them saw their fees fall by more than 10% . Meanwhile, 21% of the share classes we examined ratcheted up their take. Nearly half of all funds have established manage- ment-fee breakpoints in their prospectuses, whereby expense ratios are automatically reduced at prespecified asset thresholds. As the current bull market has grown long in the horns, many funds

have crossed these thresholds because of some combination of asset-price appreciation and net new flows. While some fees are falling, that’s been driven primarily by investors moving their assets to low-cost funds—not by steep cuts in fund expenses. While the annual report net expense ratio includes all explicit fees incurred by a fund, these fees can be disaggregated and itemized according to their various sources, such as the advisor (management) fees, administration fees, distribution fees, and so on. Not all firms break out these expenses nor are they listed in a transparent and consistent way to help investment decision-makers. Funds that held 84% of all assets as of the end of 2009 listed an advisor fee in both 2009 and 2014 . The asset-weighted advisor fee for these funds was 0 . 45% compared with an asset-weighted net expense ratio of 0 . 79% . By 2014 , the asset-weighted advisor fee had dropped by only 1 basis point to 0 . 44% while the asset-weighted net expense ratio dropped to 0 . 67% . So the decline in the asset-weighted net expense ratio we detail above was not so much driven by lower advisor fees as it was by lower fees covering other items such as distribution and administration. BlackRock Fined for Conflict of Interest There are little conflicts of interest and then there’s what happened at BlackRock. The SEC has fined the firm $12 million for its failure to manage a big conflict of interest with former portfolio manager Dan Rice. The facts in the case have largely been known for years thanks to some good work by The Wall Street Journal . The strange thing here is that BlackRock knew about the issue and decided it wasn’t a problem. K