Russel Kinnel is director of manager research for Morningstar and editor of Morningstar® FundInvestor℠, a monthly newsletter.
The typical investor paid lower fund expenses in 2016 than ever before. The asset-weighted average expense ratio across funds (excluding money market funds and funds of funds) was 0.57% in 2016, down from 0.61% in 2015 and 0.68% five years ago, according to a report
by Morningstar senior analyst Patricia Oey. This figure is the asset-weighted average across equity, fixed-income, balanced, and alternative funds, which include almost 24,000 share classes (load, institutional, retirement, other/no-load, and exchange-traded fund). This decline stems from investor demand for cheaper passive funds (index funds and ETFs) and strong flows into institutional share classes, which carry lower fees. Vanguard also contributed to average fee declines, as its low-cost passive funds continue to attract large flows.
This decline is a positive trend for investors, as mutual fund costs have a direct impact on the future value of investors' portfolios. Although most fee declines were small, some have been quite significant. Those at funds we already considered worthy of Morningstar Medalist status are particularly noteworthy.
Schwab Fundamental US Large Company Index
cut fees by 10 basis points to 0.25%. While most declines in active fund fees are due to rising assets, index providers like Schwab and Vanguard chose to aggressively cut fees rather than wait for asset growth to trigger breakpoints. This fund, which has a Morningstar Analyst Rating of Bronze, is a value-leaning index fund that uses "fundamentals" like sales and cash flow to determine weightings rather than market cap. The fee cut makes it a more compelling choice.
has long been a well-run fund but suffered from a high price tag. In November, it added a 15-basis-point fee waiver, bringing costs down to 1.17%. That's still not cheap, but it's more reasonable.
Gold-rated FMI Common Stock
is an outstanding fund on the small/mid-cap border. The firm implemented new fee breakpoints, and the fund's prospectus net expense ratio is now 1.04%, which is an improvement on the 1.17% expense ratio it charged a couple of years ago. Lead manager Pat English has done a great job combining value and quality metrics for this fund.
is just showing up on investors' radars. It's a strong fund run by Rupal Bhansali. Ariel's board cut fees by 12 basis points so that the fund charges 1.13% for individual investors and 0.88% for institutional investors. Bhansali runs a concentrated portfolio of companies with high returns on capital, and it has worked out well so far.
's fees have fallen to a very cheap 0.30% from 0.39% for the Investor shares, and the Admiral shares (minimum $50,000) are now just 0.20%. One of the great things about investing in Vanguard funds is that they drive costs lower for you. In this case, it may be partly due to performance fees for the subadvisors. If so, costs might tick higher with stronger performance, but they will be cheap either way. Wellington runs 70% of the fund and deep-value shop Pzena runs 30%. The fund tends to be rather economically sensitive, giving it both above-average return potential and above-average volatility. Overall, it's a good value proposition at this price.
Vanguard Mid Cap Growth
is likewise a high-risk/high-reward fund. Fees have come down to 0.36% from 0.43%, making it the cheapest actively managed fund in the mid-growth Morningstar Category. Only a couple of index funds are cheaper. The fund is run by William Blair and RS Investments. Once again, a performance fee is making this fund a bargain. As our Bronze rating implies, we think it's very capable of a rebound and, at this cost, it only has to add a modest amount of value to pull even with the index fund competition.