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Decline in mutual fund fees is positive turn for investors

Mutual fund fees fell slightly last year, driven in part by demand for low-cost funds.

That's good news for investors, because fees cut into fund investment performance year after year, whether the stock market climbs or falls. Although there's no controlling the market's direction, individuals can control how much they pay to invest.

The latest numbers are in separate reports issued last week by researcher Morningstar Inc. and by the fund industry's trade organization, the Investment Company Institute.

Both reports examined average fund expense ratios charged in 2011. That's the ongoing expense that investors pay for operating costs, expressed as a percentage of a fund's assets.

To calculate average expenses for thousands of funds, both Morningstar and ICI use a method called asset-weighting. That means that expenses at funds with more assets, and therefore more investors, count more toward the average than expenses at smaller funds.

The typical investor paid 0.75 percent last year, according to Morningstar, or $7.50 for every $1,000 invested. That's down from 0.77 percent in 2010. Morningstar's figure is the average for stock funds and bond funds, as well as funds investing in alternative assets such as precious metals and commodities.

Fees fell more sharply at stock funds than they did at bond funds, Morningstar said. U.S. stock funds charged an average 0.74 percent last year, while funds investing primarily in foreign stocks charged 0.93 percent. Taxable bond fund expenses averaged 0.63 percent, while municipal bond funds averaged 0.60 percent.

The ICI didn't calculate an average across all types of funds. The industry group said stock fund investors paid an average of 0.79 percent last year, down from 0.83 percent in 2010. Bond fund investors paid 0.62 percent, down from 0.64 percent the previous year.

Fund companies' fee revenues decline when the stock market falls, because lower asset values result in lower fee collections. The market was essentially flat in 2011, and the ICI said stock fund assets were stable, ending the year at about $5.2 trillion. Stock fund assets posted big increases in 2009 and 2010.

The fee declines are in line with a long-term trend of lower fund expenses. Average fees have fallen most years, and investors paid an average of 0.94 percent 10 years ago, Morningstar said.

What's behind the dip in fees?

*Growth of lower-cost funds -- Morningstar and the ICI say several factors are driving the fee decline. One reason is that a growing number of investors are choosing lower-cost funds.

*Popularity of bond funds -- Overall expenses are falling, partly because bond funds have been attracting new cash, while money has been pulled out of stock funds. Bond funds generally charge lower expenses, so the greater share of investor assets they hold is helping to drive average fund expenses lower. Growth in bond funds has made those funds more cost-efficient, because there are more investors to pay fees to cover operational expenses, the ICI said.

*Fee cuts -- Some fund firms have cut their fees, or restructured fees to expand access to lower-cost funds.

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