(April 17, 2014) — Analysis of the investment management fees paid by plan sponsors for mutual funds has found a decrease in prices over the past three years.
Data collated by consultants Hewitt EnnisKnupp found that, on average, institutional investors were paying less for their mutual fund investments compared to 2011.
The drop in cost has been attributed to two reasons: frstly, an increased focus by plan sponsors on the reasonableness of fees was causing them to replace more expensive options in their portfolios with less expensive ones, thus driving the fees down.
Secondly, lower fees could be seen as the reason for outperformance (net-of-fees) within a peer group, which would prompt more investors to opt for those lower-fee funds, meaning the asset base in lower cost strategies would climb at a quicker pace than higher cost strategies, helping to drive down fees.
There was one anomaly however—small cap equities. This market was perceived to be less efficient by Hewitt EnnisKnupp, which supports active management’s ability to add value relative to corresponding benchmarks.
“These firms tend to be very research-intensive, which, in turn, can be more costly than the more exhaustively covered large cap market,” said Gregory Fox, a consultant at Hewitt EnnisKnupp.
“Additionally, due to capacity constraints in this area of the market, one could also argue that supply and demand place upward pressure on fees as well. With an increasing number of popular small cap products closed to new investors, those products that are open are able to command a premium.”
Morningstar data published earlier this week showed US investors added $39.2 billion to long-term mutual funds in March, driven by continued strong flows to developed international markets and a rebound in flows to intermediate-term bond funds.
PIMCO was the only fund provider among the top 10 to see net outflows in the first quarter, apart from Fidelity, which transferred $6.5 billion from equity mutual funds to collective investment trusts in March. PIMCO saw $3.1 billion flow out of its Total Return fund in March alone.
In addition, investors have begun to pour more money into equities funds. Data from the Investment Company Institute published yesterday showed $5.7 billion was invested in stock funds in the week ending April 9, the strongest demand for the funds since mid-February.