A Retrospective Look at the Mutual Fund Industry

Observant1

John Rekenthaler from M* reminisces about the mutual fund industry over the past 33 years.
Random quotes below.


"In 1988, the largest mutual fund was Franklin U.S. Government Securities (FKFSX), which finished the year with $11.7 billion."

"In 1988, three index funds existed: 1) Vanguard 500 Index (VFINX), 2) DFA U.S. Micro Cap (DFSCX), and 3) a brand-new entrant from Fidelity that was eventually merged into the company’s current offering Fidelity 500 Index (FXAIX). (Even that list is suspect, as DFA now states that its funds are actively managed. However, as it called DFA U.S. Micro Cap an index fund at the time, that is where I have placed it.) In aggregate, those funds held $2 billion, making for a market share of slightly under 0.5%."

"Back in the day, investors who emphasized fund expenses were viewed as cranks. Life was too short to worry about a few basis points. In 1993, for example, the five top-selling mutual funds carried average an average expense ratio of 1.09%."

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Sven

Interesting article. Looking back, many mutual funds used to carry front-load unless you invest through advisors. Then came the no-load mutual funds and investors can buy or sell directly from the mutual fund companies. Discount brokerages such as Schwab opened the One Source mutual fund supermarket. Soon it was joined by Fidelity. The internet certainly leveled the playing field with respect to the flow of information.

The management fee also have come down considerably with the expansion into index funds and ETFs. Even trading stocks and ETFs are free in major brokerages.

Observant1

There have been many changes in the fund industry over the years which benefit today's investors.

Sven

Absolutely. My father has to work with brokers and paid high fees for investing. It is quite different today.

Observant1

I never needed to work with brokers but I started seriously investing in the early 90s.
Overall mutual fund expenses were considerably higher then.
As you mentioned, some funds had loads and there were commissions for trading stocks.
Also, there was much less quality online content available.
I would go to the library to read Morningstar's Fund Reports, Barron's, Smart Money, etc.

Sven

Yes, I did exact what you did at the library. For a number of years, I subscribed to No-load Fund Analyst that taught me everything I knew today about mutual funds and more. The internet allows me to further my learning in several blog sites including bogleheads and others. Several of MFO posters here subscribe to Barron’s as well - useful as a sounding board on the global economy.

msf

I feel that the perceived decline in fund fees is largely illusory once one controls for: payment to advisors (which has been externalized, moving the source from 12b-1 fees and loads out of the funds to separate wrap fees); the increase in the relative number of index funds (which reduces the industry average cost but not the cost of each fund); the belated rotation by investors from higher cost funds to lower cost funds (thus reducing the dollar weighted industry average cost).

The ICI writes: "The decline in the average expense ratios of equity, hybrid, and bond mutual funds in 2020 primarily reflects a long-running shift by investors toward lower-cost funds or fund share classes."
https://www.ici.org/system/files/attachments/pdf/per27-03.pdf

To a lesser extent, there have been cost reductions due to economies of scale. That's a double edged sword, as larger funds have less agility and less ability to take advantage of small opportunities.

Certainly index fund costs have come down and for them agility is not a key concern. And the ability to invest in lower cost institutional class shares albeit with transaction fees, is a fairly recent improvement.

But if costs have come down so much, why don't we see more fund companies like American Funds or D&C focused on low cost funds? For example, in 1992, the ER of FCNTX was (per prospectus) 0.87%%. That was with around $6B in assets. Thanks to economies of scale - the fund now has $146B in assets - the ER has dropped to .... 0.86% (from Fidelity's current page for the fund).

hank

It’s nice not to be paying a 4%+ front load as I was with Templeton thru our only workplace option in the 70s. We accepted that as normal. Indeed, we were assured that the same fund(s) if purchased outside our privileged workplace plan would have cost us something like 7% in front-end fees.

The rapid growth of ETFs I guess is passé by now. But the advent of actively managed ETFs adds a new wrinkle - and perhaps complicates the cost analysis factor. I’d guess actively managed ETFs cost less on average less than their mutual fund cousins and can’t help wondering whether the added expense of mutual funds is justified.

From latest Barron’s -

“We're closing out another banner year for the fund industry, which has seen record asset flows …
Exchange-traded funds continued their momentum, gathering more than $900 billion of new money with two weeks left in the year, crushing last year's record of $500 billion in net inflows. Nearly 450 new ETFs were launched this past year …

“The ETF industry has grown to $7 trillion—still smaller than the $20 trillion in mutual funds, but the catchup seems inevitable. This year, we saw the first-ever conversion from mutual fund to ETF—first from Guinness Atkinson and Dimensional Fund Advisors, followed by JPMorgan and Franklin Templeton announcing similar plans for 2022. Yet in at least one way, the ETF industry is looking more and more like the mutual fund industry: It is embracing active management.”

“What the Future Holds for ETFs” / By Evie Liu
Barron’s - December 27, 2021

Observant1

Actively managed ETFs have lower expense ratios and broader distribution than similar OEFs.
Fund firms launched active ETFs in an attempt to better compete against (gain AUM) passive ETFs.
There were 2,688 ETFs available to U.S. investors as of Nov. 24, 2021.
However, the largest 100 ETFs accounted for nearly 70% of the $7T total invested in ETFs.
This year, Vanguard Total Stock Market (VTI) received $40B of net inflows through Nov. which
constituted 5% of all ETF inflows.

yogibearbull

I am disappointed by the high ERs of the new active ETFs. I don't want an active ETF at 60-80% of the ER of its OEF cousin, but I want it at more like 25-35%. That may happen when some disruptors enter this market (who?).

Remember that is what happened to factor ETFs when Goldman Sachs/GS ruined the gravy train for everybody. Now GS isn't your typical low-cost leader, but when it entered the factor ETFs, it did it with a splash that was heard across the industry.

hank

I read a recent article stating that $50 mil AUM is considered a minimum level for an ETF to be sustainable longer term and suggesting many newer ones may need to close in a few years if they can’t garner that level. I recently bought some of Invesco’s PSMM (actively managed fund-of-funds) costing .33% - including accrued expenses of the underlying funds. Not looking for criticism or affirmation of the choice. Just tossed it out as an example of what’s available at what cost. The fund only has around $20 mil AUM at last look - but appears to be growing steadily.

FWIW - While .33% is still higher than others, it’s about half the cost of PRSIX - an actively managed mutual fund at T. Rowe with a similar 40/60 allocation.

carew388

I've been using AOR which has a 60/40 stock/bond allocation. I would be perfectly happy with an etf version of a balanced fund, but so far I haven't found one !

yogibearbull

iShare allocation series AOK, AOM, AOR, AOA is mislabeled by a notch. So, moderate-allocation AOM is really conservative-allocation (30-50% equity) by other classifications.

Also, for active funds-of-funds, don't ignore robo-advisors that are active funds-of-funds for ERs of 0-0.30%.

carew388

+1