JOE FUNDPACK’S BURDEN LIGHTER AS INSTITUTIONS TOTE THEIR SHARES: DECLINE IN FUND COSTS IS BRADBASED, THOUGH, AN ICI STUDY FINDS

The increase in mutual fund sales to institutions in the past decade has led in part to the large decrease in shareholder cost since 1980, a new study reveals.

Institutional funds made up 15% of total equity mutual fund sales in 1998, compared with 0.2% in 1980, according to the report titled “Mutual Fund Costs 1980-1998” by the trade association Investment Company Institute in Washington.

Because institutions generally have larger amounts invested with a mutual fund company than do retail investors, operating costs passed on to investors have dropped as mutual funds have been embraced by institutional investors. The result has been lower costs for the fund industry overall, the study indicates.

The increased use of index funds in recent years also has had an impact. Nearly 10% of all equity fund sales in 1998 were index funds, up from 0.6% in 1980.

Index-linked funds typically cost less to maintain than do actively managed funds, thus contributing to the drop in total mutual fund costs.

Many factors apply

The study is quick to point out, however, that bigger institutional investments in mutual funds and increased use of indexed funds are not the only factors in the decline in costs.

If institutional fund sales aren’t considered, retail fund costs still dropped 36% between 1980 and 1998, to 1.45 percentage points from 2.26. If institutional and indexed funds are excluded, total shareholder cost for actively managed retail funds fell 32%, according to the ICI.

When the equity mutual funds of the three largest fund complexes are excluded, total shareholder cost for equity funds declined 34% to a sales-weighted average of 1.52 percentage points from an average of 2.32 percentage points.

The three largest fund complexes in the ICI universe are Fidelity, Vanguard and American Century funds; these groups accounted for 24% of equity mutual fund sales last year.

“This study confirms that the decline is broad based and is not significantly affected by the presence of a narrow group of relatively lower-cost funds,” says ICI President Matthew Fink.

Shareholder costs, especially for equity funds, have been dropping since 1980. By 1990, total cost had dropped 17%, or 0.38 percentage points, according to researchers.

So far in the 1990s, the total cost of equity funds has dropped an average of 28% or 0.53 percentage points, according to the report.

cheaper distribution cited

In 1998 alone, equity fund costs dropped 5.6% to 1.35 percentage points from 1.43 in 1997; the authors of the study attribute the decrease to lower distribution costs and decreased mutual fund operating expenses.

Average bond fund costs have dropped 29% since 1980, slipping 3.5% alone in 1998, to 1.09 percentage points from 1.13 in 1997. Lower distribution costs led to the decrease, the report states.

Average money market fund costs have declined 24% since 1980, dropping to 0.42 percentage points in 1998 from 0.43 the previous year. The decrease came from lower fund operating expenses, the report states.

The study was conducted by John Rea, vice president and chief economist; Brian Reid, senior economist and director of industry research and financial analysis; and Travis Lee, research associate.