In a double whammy for investors, stock funds became marginally more expensive to own even as their value plummeted during the bottoming out of the market, according to new data from Lipper. Specifically, stock funds' expense ratios increased by an average of 5.2 basis points, or .052 percent, between Nov. 1, 2008, and June 30, 2009. During that eight-month window, annual fees for sector-specific funds rose at disproportionately high levels compared with other types of stock funds. Meanwhile, reduced fees for money market funds and relatively steady charges for fixed-income funds helped balance out some of these increases.
The Lipper study examines funds whose fiscal years wrapped up between Nov. 1, 2008, and Jan. 1, 2009. For nearly 1,500 of those funds, Lipper compared how their expense ratios changed from their annual reports at the end of fiscal year 2009 to their semiannual reports, which came out between April 30 and June 30 of this year. After throwing out outliers on either end of the spectrum, analysts arrived at the final numbers. In identifying the fee increases, Lipper pinpointed a trend that is common during downturns: As funds' asset bases shrink, each individual investor becomes responsible for a larger portion of the operating costs.
Overall, stock funds focusing on a market sector registered the most significant increases, with fees rising by an average of 10.9 basis points. These increases reflect the volatility of sector funds, which are often small to begin with and can suffer disproportionately from outflows and diminishing returns.
By market capitalization, midcap funds led the pack with an average increase of 7.3 basis points. This finding is "not really intuitive," says Lipper analyst Jonathan Kreider, the author of the study. "It was definitely a surprise. I didn't see any reason that midcap equity funds would increase in expenses more than other types of funds," he says.
As stock funds hiked their fees, expense ratios for taxable fixed-income funds remained virtually unchanged, increasing by an average of only 0.9 basis point. And expense ratios for retail money market funds dropped by more than 6 basis points, as low interest rates forced funds to waive management fees in order to maintain positive yields.
These management-fee dynamics also surfaced in other ways as funds struggled to stay afloat in the ailing economy. Notably, even as total expense ratios increased in many instances, funds generated significantly less revenue for their providers. In fact, average fees paid to managers actually held virtually steady or dropped for almost all classes of funds during the study's time window, suggesting that fixed costs like transfer agency expenses were the real drivers of the increases in expense ratios, since each investor had to shoulder a larger portion of them.
Still, the situation could begin to normalize as the market recovers. "If we get an economic rebound, people start throwing more money back into the stock market, [so] you're going to see these expense ratios . . . decline," says Kreider.