Lipper Report Offers Snapshot As 2003 Begins To Take Shape

By

Trends described in a recently released report on the mutual fund industry played out during first quarter 2003, as the tenor for the year started to take shape.

Domestic equities will start to stabilize after racking up three years of losses, corporate bond funds will benefit from even a modest economic recovery and fees will continue to evolve, says a report released last month by Lipper, New York.

The report takes a look at trends that will shape the mutual fund industry following a volatile 2002. It examines trends in the United States as well as other regions throughout the world.

Among the findings the report, “Global Themes in the Mutual Fund Industry-2002″ outlines is a “majority view” that the three-year consecutive decline in the equity market will end, but the net gain will be moderate–probably under 10%. This gain follows a 2002 loss for U.S.-based equity funds that totaled 20.84%.

The report also offers promise for corporate bond funds. A modest economic recovery, according to the report, could benefit corporate funds because of a “steady-rate environment” and a decline in spreads compared with U.S. Treasury bonds resulting from reduced risk aversion.

However, the report adds, the market will also probably wait until there is more “clarity” on the outcome of the war in Iraq. Other geopolitical factors that could “turn this forecast completely on its head” include risks associated with North Korea and the exchange rate of the U.S. dollar compared with its major trading partners, the Lipper report continues.

Fund expenses have also increased in 2002, in part due to a decline in average net assets, says the report. Total expense ratios rose to 1.266% from 1.249% a year ago largely because the market downturn diminished average net assets. The increase cost shareholders approximately $1 billion, the report says.

Nonmanagement expenses also rose because of the decline in average net assets, the report finds. These expenses increased to .303% in 2002 from .288% in 2001.

Going forward, management fee structures may change, the report continues. Several fund companies have begun to implement performance incentive fees that start with a lower base fee and increase or decrease depending on performance relative to a benchmark, the report says.

In a quest to increase assets under management, direct marketers are opting to add 12b-1 fees ranging from .25% to 1% to compensate financial intermediaries, the report says, and the number of funds assessing these fees has increased to 63% from 60% five years ago. However, the report notes, the median 12b-1 fee remained unchanged in 2002 compared with 2001, at .650%.


Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.