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Mutual Funds: THIRD-QUARTER REVIEW FOR INVESTORS : EXPENSE RATIOS : The Upkeep Can Be Costly

October 02, 1994|RUSS WILES | SPECIAL TO THE TIMES

Every bit counts during tough times, which explains why mutual fund expenses are taking on added meaning in the current flat investment climate.

At times like these, the size of a fund's expenses can mean the difference between winding up in the plus or minus column, because expenses directly reduce a fund's performance numbers. All funds are required to report their expenses in a standard manner, which makes for quick and easy comparisons. Expenses are most commonly represented as a percentage of total assets--the so-called expense ratio.

You can find this number in the fund's prospectus or disclosure documents, as well as in research publications. The Times is including expense ratios in today's quarterly mutual fund tables.

The expense ratio summarizes the costs for professional management, diversification, record-keeping, asset safekeeping, fund-switching privileges and an assortment of other services. The annual cost is often less than a penny for every $1 invested.

Sometimes a fund will waive expenses in a bad year to help the fund's overall performance, or because expenses were low and the fund decides to pass the savings to investors. For example, the Franklin Equity Income Fund described on T-4 charged 0.79% in its last fiscal year, though it could have charged 1.12%.

Overall, expense ratios have not been going down despite increases in fund assets. Generally, critics charge, it doesn't cost twice as much to manage $80 million in assets as $40 million in assets--but a 1% expense charge yields twice as much money on the larger fund than the smaller.

Differences among funds remain as wide as ever. Some bond or index funds charge shareholders less than 0.5% a year, while a few charge over 3%.

Extremely high or low expenses clearly can make a difference. But there's some debate as to how important expense ratios are for more common portfolios.

Bruce Johnstone, a managing director at Fidelity Investments, notes that expenses have already been subtracted from the performance numbers, so investors should be sure not to count them twice.

Robert Berliner, chairman of Westmount Asset Management in Los Angeles, says he compares a fund's expense ratio to group averages, but he doesn't make it an overriding consideration.

"Within the same classes of bonds, the difference in performance is almost always due to a difference in expenses," Berliner says.

Expense ratios do not include brokerage commissions and other trading costs--though such costs are reflected in overall performance.

Expenses do include 12b-1 fees, often used in broker-sold funds as a kind of long-term commission or to pay for marketing.

*

Russ Wiles' Mutual Funds column normally appears Sunday in Business.

Average Expenses:

In general, bond funds charge a smaller percentage of assets for expenses than do stock funds, and U.S. stock and bond funds charge less than those investing overseas.

Average Fund Type % Charge Global stock 1.93 Natural resources 1.88 Aggressive growth 1.81 Precious metals 1.78 International stock 1.63 International bond 1.57 Growth 1.37 Small company 1.36 High-yield corporate bond 1.30 Balanced 1.20 Growth & income 1.16 U.S. government bond 0.98 Corporate bond 0.92 National municipal bond 0.85 California municipal bond 0.85

Source: Morningstar Inc.

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