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Rekenthaler Report

Die, Horse, Die!

Burton Malkiel lashes a carcass.

Cheap Funds Are Chic
Yesterday's The Wall Street Journal carried an Opinion piece sounding a familiar theme: "You're Paying Too Much for Investment Help." Written by Burton Malkiel, the article lambastes the U.S. mutual fund industry for overcharging for active management and for not passing along its economy of scale to shareholders. In 1980, the asset-weighted annual expense ratio for funds was 0.66%. Today, Malkiel argues, the asset-weighted expense ratio is almost identical at 0.69%, even though the industry boasts more than 100x the assets of 1980.

It's a fair point. If I wished to take apart Malkiel's argument, I'd show how the industry's fee structure has changed since 1980. Front-end sales changes have largely disappeared, replaced in many cases by 12b-1 fees. As front-end loads do not appear in official expense ratios and 12b-1 fees do, this switch has the effect of making today's funds look more expensive. However, this switch is offset by the fact that there are proportionately more assets today in institutional funds, index funds, and bond funds. So, overall, it's a wash: Expenses for today's funds may reasonably be compared to those of yesteryear.