UNITED STATES: Mutual Fund Fees and Active Share

Monday April 30 2018

Attorney General Eric T. Schneiderman announced that after an industry-wide investigation into mutual fund disclosures and fees, 13 major mutual fund firms—including those run by some of the largest players in the mutual fund industry—have agreed to voluntarily publish important information about their mutual funds to all retail investors. Under the agreements, the firms will disclose new information that can help retail investors determine whether a higher-cost, actively managed mutual fund fits their investment goals better than another, lower-cost alternative.

The newly disclosed information, known as Active Share, measures the percentage of stock holdings in a fund’s portfolio that differs from that fund’s benchmark index—key information investors can use to determine whether a higher-fee, actively managed fund has the potential to beat the benchmark returns of a lower-cost, passively managed fund. The AG’s investigation found that while these major mutual fund firms regularly disclosed this information to well-heeled institutional and professional investors, retail investors were often excluded.

A report issued today by Attorney General Eric Schneiderman’s Investor Protection Bureau, “Mutual Fund Fees and Active Share,” details the findings of an investigation into fees charged by actively managed mutual funds, their disclosures to investors, and their portfolio composition relative to their fees.

The Attorney General’s investigation considered fees and disclosures for over 2,000 actively managed mutual funds – mutual funds are a popular way for investors to diversify their savings, and today, nearly half of American households invest in mutual funds, either directly through individual and retirement accounts or indirectly through other investment vehicles.

The key findings detailed in the report are:

• Actively managed funds are typically much more expensive investment options than index funds. On average, fees on an investment in an actively managed fund cost an investor almost 4.5x more per year than fees on an investment in a passive fund.
• Higher fees for actively managed mutual funds do not necessarily reflect a higher level of active management. When choosing among actively managed mutual funds, investors should not conclude that a higher fee necessarily reflects a higher level of active management, as measured by the fund’s variation from its benchmark. Based on a review of fees and disclosures for over 2,000 mutual funds, investors cannot necessarily assume that a high fee, or expense ratio, for a particular mutual fund means that the fund will have a high Active Share – in other words, an investor cannot look only to the fees charged to invest in a fund in order to assess the fund’s potential to outperform the market (or the risk of underperformance), as measured by the Active Share metric.
• Fund managers use Active Share information to help analyze mutual fund investments, and mutual fund companies provide Active Share to some professional and institutional investors, but generally not to retail investors. The Active Share metric allows investors to understand how much a particular fund overlaps with or diverges from its benchmark index. While not an absolute indicator of active management, Active Share has become a widely-used metric for mutual fund managers.

Following the Attorney General’s investigation, 13 firms agreed to make Active Share information available to all mutual fund investors by committing to publish Active Share for their actively managed, equity-based mutual funds available to U.S. investors.

Click on the link above for further information.