Management Fees Are Rising As the Bear Prowls
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Wednesday, October 30, 2002

Management Fees Are Rising As the Bear Prowls

Thanks largely to the bear market, fund firms are hiking mutual fund management fees, according to a 440-page Lipper industry report that updates a widely followed 2000 study.

The report focuses on management fees, an important component of a fund's total expense ratio. The fee compensates the fund's manager and is deducted from the fund's return before it is reported to investors. Management fees tend to range from 0.02% of fund assets per year for one institutional index fund to 3.25% for a balanced fund carrying an all-inclusive fee schedule, according to the fund tracker.

About 59% of fund portfolios currently have "breakpoints" that lower management fees as assets in the fund rise in value, passing along economies of scale. These breakpoints also work in reverse when assets decline, as they have this year. This dynamic has spurred the rise in median management fees across most equity mutual fund categories, according to the study.

Also, the report found that the number of funds using performance incentive compensation for the management firm is climbing. Though still uncommon, they are increasingly being tapped by the likes of Vanguard Group and Fidelity.

With many stock-fund investors groping for terra firma, fund boards generally have been reluctant to tinker with their fee structure, according to the fund tracker. Some funds have added additional asset breakpoints, but very few have taken steps to raise management fees beyond the percentage rises linked to asset declines.

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