American Funds Is Latest Player to Reduce Fees

Los Angeles-based American Funds said Thursday that it would reduce the fees on all 29 of its mutual funds, the latest in a series of competitive moves by key players in the $8-trillion industry.

Starting April 1, the shareholders will save 10% in advisory fees, the company said. The total savings for all shareholders is estimated at $200 million a year.

For Growth Fund of America’s class A shares, for example, the advisory fees will be lowered to 0.26% from 0.29%. So for a $10,000 investment, that would trim the annual portfolio management cost to $26 a year, down from $29.

“We have a history of recognizing that as assets grow, it’s appropriate and fair to reduce fees,” said Paul Haaga, executive vice president of Capital Research & Management Co., the Capital Group unit that acts as investment advisor to the funds. American Funds, a unit of Capital Group Cos., is the third-biggest player in the mutual fund industry with about $690 billion in assets.

Haaga noted that American Funds’ assets have doubled in the last three years. The firm’s relatively conservative funds, which fell out of favor during the go-go 1990s bull market for stocks, have fared better against their peers in recent years.

Because mutual fund fees are written into contracts, the fee reduction is being accomplished through what’s known as a “voluntary waiver.” Haaga said the waiver would be indefinite.

The company began the process of reducing fees last year, when it shaved 5% off its advisory charges. With this step, it will remove a total of 10% of those charges.

While American Funds cited its swelling assets as a major reason for the move, industry analysts said competitive forces were at play as well.

“The whole fee structure of the industry is under downward pressure,” said Don Cassidy, senior analyst at research firm Lipper Inc. in Denver.

That pressure has come from a mix of voluntary and mandatory fee reductions, he said.

Fidelity Investments and Vanguard Group Inc., the two biggest fund companies, have been in a high-profile spat since last fall, when Fidelity lowered fees on its index funds. That undercut Vanguard, long considered the low-price leader.

After Fidelity announced the waivers, the head of Vanguard mocked the move as a temporary “marketing ploy.” Fidelity recently snapped back by making its waivers permanent and issuing a defiant news release.

The surging growth of low-cost exchange-traded funds, which track indexes such as the Standard & Poor’s 500 but trade throughout the day like individual stocks, has highlighted the issue of fund expenses as well, Cassidy said.

And the fund industry trading and sales scandals have come into play. In settling investigations over alleged trading abuses that benefited well-heeled investors, New York Atty. Gen. Eliot Spitzer has wrested five-year fee concessions from fund firms including Janus Capital Group Inc., Alliance Capital Management and MFS Funds.

Industry critics such as Spitzer have called such cuts overdue.

They note that although the mutual fund business has ballooned in size over the last decade, the fees charged shareholders have stayed at the same level, at least until this year.

The average expense ratio for stock funds in 2004 was 1.54%, according to data tracker Morningstar Inc., versus 1.51% in 1995. Advisory fees are one component of total expense ratios.

Haaga said that by using voluntary waivers rather than rewriting the management contracts to lock in the reductions, American Funds was able to make deeper cuts that better serve investors.

Though the firm has been riding high, he called its sales dominance “unsustainable” and said that the firm faced challenges on several fronts, which could put it in an awkward position if its fortunes reverse and it seeks to undo permanent cuts.

NASD, the brokerage industry’s self-regulatory body, has accused the firm of improperly using trade commissions generated by the fund portfolios to reward brokers who sell its funds to the public. American Funds has vowed to fight the enforcement action by the group, formerly called the National Assn. of Securities Dealers.

The Securities and Exchange Commission and the California attorney general’s office also are investigating the firm’s sales practices.