2012 LIPPER’S QUICK GUIDE
TO OE FUND EXPENSES
© Thomson Reuters 2012. All rights reserved.
© Thomson Reuters 2012. All Rights Reserved. This report is for informational purposes only, and does
not constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any
entity in any jurisdiction. No guarantee is made that the information in this report is accurate or complete
and no warranties are made with regard to the results to be obtained from its use. In addition, Lipper will
not be liable for any loss or damage resulting from information obtained from Lipper or any of its affiliates.
For immediate assistance, feel free to contact Lipper Client Services toll-free at 877.955.4773 or via email at
[email protected]. For more information about Lipper, please visit our website at
www.lipperweb.com.
2012 LIPPER’S QUICK GUIDE TO
OE FUND EXPENSES
JUNE 2012
INTRODUCTION
Each year, Lipper produces the “Lipper Quick Guide to OE Fund Expenses”.
The report for open-end (OE) funds consists of a single table displaying the
asset-weighted average and average total expense ratios by load type
(front-end load/no-load, back-end load/level-load, and institutional), fund
type (actively managed funds, index funds, exchange-traded funds, and funds
of funds), and Lipper classifications/objectives1. The table provides a quick
reference to total expense ratios and enables the reader to compare them
between different groupings.
1
For more information on Lipper classifications/objectives, please go to www.lipperweb.com
AUTHORED BY:
PETER DE SOUSA BARROTE
FIDUCIARY SERVICES SPECIALIST
FIDUCIARY SERVICES, LIPPER
[email protected]
Please note that the views expressed in this document
are intended as nonconsultative and do not constitute
legal advice.
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2012 LIPPER’S QUICK GUIDE TO OE FUND EXPENSES
JUNE 2012
METHODOLOGY
The 2012 Lipper Quick Guide to OE Fund Expenses contains expense ratios for
open-end funds with fiscal year-ends in 2011 and at least six months of operating
expense data. Because Lipper only reports on audited fiscal expense data derived
from each fund’s annual report (publicly available two months after the fiscal
year end for each fund), actual reported fund expenses may appear sluggish in
reacting to market conditions.
FINDINGS
OVERALL
Overall total expense ratios on average for (active and passive) open-end funds
have decreased 3.4 basis points (bps) from 2010 to 2011. While actively managed
funds have on average a total expense ratio reduction of 3.1 bps, index funds and
exchange-traded funds together have declined 3.5 bps. Both equity and fixed
income funds, within the actively managed fund grouping, have also dropped their
average total expense ratios by 3.9 bps and 3.1 bps, respectively.
ALL GROUPS
Two patterns concerning total expense ratios are consistent across Lipper
classifications/objectives and fund types. The first demonstrates that assetweighted average total expense ratios tend to be lower than average total expense
ratios. While the average total expense ratio computes the simple average for a set
of funds, the asset-weighted average is computed differently and assigns an asset
weight based on the average net assets of a fund. Higher weights are assigned to
the expenses of the larger funds. For each fund, the expense ratio is multiplied by
this weight and, subsequently, its asset-weighted total is summed to obtain the
asset-weighted average for a set of funds. For example, large-cap institutional
funds have an average total expense ratio of 0.979%, compared to an assetweighted average ratio of 0.703%. Based on the different calculation methods, the
variation between these two averages stems from economies of scale. Typically,
as a fund grows in asset size, greater operational efficiencies may be achieved.
However, economies of scale do not continue indefinitely; at a certain asset level
economies of scale decrease at an increasing rate. At some point, large complexes
may even experience scale diseconomies, whereby larger funds cost more to run.
Weighting the expense ratio by the assets of the portfolio tends to equalize the
discrepancy between small funds with higher expenses and larger funds, which
can charge lower expenses.
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2012 LIPPER’S QUICK GUIDE TO OE FUND EXPENSES
JUNE 2012
The second finding concerns load types. Institutional funds tend to have lower
total expense ratios compared to front-end/no-load funds, while back-end/levelload funds typically have the highest average and asset-weighted average total
expense ratios. For example, institutional long municipal debt funds’ average total
expense ratio is 0.587%, compared to 0.766% for front-end load/no-load funds.
Back-end load/level-load long municipal debt funds’ average total expense ratio
is higher still at 1.480%. The expense differences between funds of different load
types can be partly attributed to 12b-1 and non-12b-1 service fees incurred based on
the method and type of distribution of the funds. Additionally, institutional funds
may only be available to specific investors and, therefore, incur fewer advertising
costs than their retail counterparts.
FUND TYPES—INDEX FUNDS AND EXCHANGE-TRADED FUNDS
This table displays several interesting findings across fund types. Index funds and
exchange-traded funds (ETFs) are less expensive than actively managed openend funds. For example, US diversified equity (USDE) institutional index funds
and USDE ETFs have asset-weighted average total expense ratios of 0.162% and
0.195%, respectively, versus actively managed USDE institutional funds with
expense ratios of 0.765%. This difference is mostly due to operating structure.
Index funds and ETFs are designed to track an index; therefore, their management
costs are lower than actively managed open-end mutual funds.
While not true in all cases, the impact of weighting total expense ratios by asset
level generally produces significant variations in numbers for index funds due
to the economies of scale. Often, nonmanagement expenses, such as transfer
agent and custodian, more heavily drive economies of scale and, in the case of
index funds, these nonmanagement expense components make up a significant
portion of the total expense ratio, as management fees are already at a minimum
due to the passive management style of index funds. Therefore, weighting the
expense ratio by assets impacts index funds’ total expense ratio more than actively
managed funds. For example, when considering actively managed front-end load/
no-load sector equity funds, the asset-weighted average is 68% less than the
average total expense ratio, compared to approximately 36% less for front-end
load/no-load sector index funds.
FUNDS OF FUNDS
The asset-weighted average and average total expense ratios for funds of funds
are difficult to compare to non-funds of funds due to differing expense structures.
The fund of funds total expense ratios (displayed as lifecycle funds and lifestyle
funds in the last lines of the table) contain expenses known as underlying fund
expenses. Underlying fund expenses are incurred from a fund’s investments in
its underlying funds. Comparing the total expense ratios for funds of funds and
non-funds of funds entails comparing expenses containing different components.
However, mixed-asset non-funds of funds do have similar average and assetweighted average total expense ratios to lifestyle and lifecycle funds of funds. This
is most likely because, despite the different expense components, they invest in a
similar mix of equity and fixed income investments.
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2012 LIPPER’S QUICK GUIDE TO OE FUND EXPENSES
JUNE 2012
ACTIVELY MANAGED FUNDS
Average and asset-weighted average total expense ratios for actively managed
funds vary by Lipper classification/objective. Equity funds are divided into five
group categories: US diversified equity, balanced/mixed equity, other domestic
equity, sector equity, and all world equity. These groups are further split into
smaller subgroups. Across load types, other domestic equity, sector equity, and
all world equity groups have the highest average and asset-weighted average
total expense ratios. Within equity funds, the groupings are not consistently more
expensive than one another; however, equity funds are more expensive than fixed
income funds. The asset-weighted average for front-end and no-load equity funds
is 0.880%, while the asset-weighted average for front-end/no-load fixed income
funds is 0.469%.
Fixed income funds are divided into three group categories: taxable fixed income,
money market, and municipal debt. Across all three load types, money market
funds have the lowest average and asset-weighted average total expense ratios,
ranging from 0.176% to 0.273%. The taxable fixed income group has the highest
average and asset-weighted average total expense ratios across the three
groupings of funds.
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2012 LIPPER’S QUICK GUIDE TO OE FUND EXPENSES
JUNE 2012
CONCLUSION
The 2012 Lipper Quick Guide to OE Fund Expenses shows that expense differences
exist across load types, fund types, and Lipper classifications/objectives. Though
the actual expense amounts for funds have changed from year to year, the general
trends discussed in this paper have held true over parallel spans of time; this
indicates that while actual expenses have changed, the trends surrounding them
have not.
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2012 LIPPER’S QUICK GUIDE TO OE FUND EXPENSES
Front-End Load / No-Load
Asset-Weighted
Average
ALL ACTIVELY MANAGED FUNDS
ALL EQUITY
ALL US DIVERSIFIED EQUITY (USDE)
Large-Cap
Multi-Cap
Mid-Cap
Small-Cap
BALANCED/MIXED EQUITY
OTHER DOMESTIC EQUITY
Equity Income
Specialty Diversified
SECTOR EQUITY
ALL WORLD EQUITY
Global
International
Precious Metals
Other World Equity
ALL FIXED INCOME
ALL TAXABLE FIXED INCOME
ALL DOMESTIC TAXABLE FIXED INCOME
Short/Intermediate Taxable Fixed Income
Long Taxable Fixed Income
WORLD TAXABLE FIXED INCOME
ALL MONEY MARKET
Taxable Money Market
Tax Exempt Money Market
ALL MUNICIPAL DEBT
Short/Intermediate Municipal Debt
Long Municipal Debt
0.721
0.880
0.871
0.770
0.901
0.990
1.121
0.692
0.981
0.850
1.289
0.927
1.007
0.989
0.942
0.961
1.276
0.469
0.656
0.625
0.556
0.695
0.936
0.250
0.246
0.267
0.528
0.410
0.602
ALL INDEXED FUNDS—INCLUDES ETFs
ALL EQUITY
ALL US DIVERSIFIED EQUITY (USDE)
Large-Cap
Multi-Cap
Mid-Cap
Small-Cap
BALANCED/MIXED EQUITY
ALL OTHER DOMESTIC EQUITY
S&P 500 Index
SECTOR EQUITY
ALL WORLD EQUITY
ALL FIXED INCOME
ALL ETFs
ETFs - USDE
ETFs - Sector Equity
ETFs - World Equity
ETFs - Other Equity
ETFs - Fixed Income
ALL FUNDS—ACTIVE & INDEXED
INDEXED FUNDS
ACTIVELY MANAGED FUNDS
ALL 2011 Total Expense Ratios
ALL 2011 Total Expense Ratios
(Including Underlying Fund Expenses)
LIFECYCLE (TARGET DATE) FUNDS
2010-2019
2020-2029
2030-2039
2040-2049
2050+
LIFESTYLE (TARGET ALLOCATION) FUNDS
Conservative
Moderate
Growth
Retirement Income
Back-End Load / Level-Load
Average
Asset-Weighted
Average
1.113
1.312
1.244
1.140
1.234
1.292
1.372
1.150
1.505
1.137
1.722
1.360
1.450
1.388
1.384
1.249
1.626
0.726
0.887
0.861
0.770
0.934
1.053
0.259
0.225
0.308
0.742
0.691
0.766
1.263
1.694
1.695
1.578
1.915
1.812
1.753
1.571
1.717
1.641
1.794
1.918
1.843
1.791
1.792
1.849
2.035
0.866
1.503
1.504
1.440
1.557
1.496
0.273
0.264
0.319
1.269
1.164
1.315
0.177
0.179
0.171
0.286
0.122
0.219
0.234
0.320
0.155
0.131
0.302
0.218
0.169
------------0.663
0.906
0.937
0.788
0.851
0.772
0.664
0.814
0.717
1.226
0.485
0.661
0.797
0.646
------------1.100
Asset-Weighted
Average
0.557
0.489
0.554
0.593
0.609
0.599
0.627
0.524
0.720
0.594
0.516
Average
1.023
0.949
1.007
1.040
1.067
1.055
1.113
1.079
1.156
1.194
0.837
Institutional
Average
Asset-Weighted
Average
Average
1.786
2.064
2.010
1.895
2.039
2.025
2.162
1.858
2.108
1.891
2.238
2.142
2.214
2.107
2.159
1.951
2.422
1.316
1.617
1.590
1.466
1.678
1.797
0.252
0.228
0.319
1.465
1.417
1.480
0.473
0.828
0.765
0.703
0.743
0.888
0.962
0.769
0.930
0.767
1.043
0.843
0.920
0.915
0.860
0.912
1.067
0.285
0.539
0.523
0.482
0.636
0.667
0.176
0.172
0.230
0.525
0.498
0.577
0.909
1.125
1.073
0.979
1.053
1.110
1.223
0.984
1.244
0.998
1.396
1.167
1.241
1.205
1.172
0.981
1.420
0.550
0.757
0.733
0.653
0.823
0.903
0.212
0.189
0.278
0.569
0.544
0.587
0.825
0.891
1.030
1.745
1.230
0.720
0.906
1.825
1.023
0.579
0.878
0.620
0.555
------------1.256
1.935
1.944
1.728
1.940
1.543
1.676
1.695
1.785
2.129
1.275
1.905
1.633
1.837
------------1.794
0.283
0.295
0.182
0.180
0.130
0.181
0.256
0.378
0.176
0.091
0.415
0.441
0.218
0.330
0.195
0.417
0.451
0.244
0.278
0.421
0.550
0.583
0.418
0.394
0.441
0.415
0.431
0.480
0.781
0.416
0.634
0.575
0.344
0.571
0.356
0.622
0.583
0.883
0.366
0.850
Asset-Weighted
Average
1.130
1.080
1.117
1.148
1.166
1.186
1.578
1.884
1.447
1.666
1.829
Average
1.723
1.636
1.730
1.737
1.761
1.756
1.890
1.857
1.874
1.964
1.610
Asset-Weighted
Average
0.792
0.742
0.776
0.817
0.832
0.838
0.762
0.811
0.802
0.731
0.729
Average
0.956
0.897
0.943
0.955
0.983
1.020
1.003
0.974
1.009
1.058
0.686
LIPPER’S QUICK GUIDE TO OE FUND EXPENSES
2012
Asset-weighted averages represent the total expenses of each fund in the asset-class weighted by the average net assets of each fund.
More weight is assigned to the expenses of the larger funds. It is intended to represent the expense ratio that is charged to the average
dollar invested in the asset class. The simple average represents the average expenses of all funds in the asset-class. Under this calculation,
each fund is assigned equal weight and the value reflects the average expense ratio that is charged by the average fund in the asset class.
All funds that invest primarily in other investment companies (funds of funds) have been excluded from the data with the exception of the
Lifecycle and Lifestyle funds. Total expense ratios for these funds include any estimated underlying fund expenses from each fund of fund’s
most recent prospectus.
© Thomson Reuters 2012. All Rights Reserved. This report is for informational purposes only, and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any
security of any entity in any jurisdiction. No guarantee is made that the information in this report is accurate or complete and no warranties are made with regard to the results to be obtained from
its use. In addition, Lipper will not be liable for any loss or damage resulting from information obtained from Lipper or any of its affiliates.
Please see www.lipperweb.com for further information regarding Lipper calculation methodologies and Lipper fund classifications. For immediate assistance, feel free to contact Lipper Client
Services toll-free at 877.955.4773 or via email at [email protected].
For institutional use only.