Watch for rising fees

BOSTON – Where are the incentives to invest? These days, auto makers are slashing thousands off sticker prices and offering zero-percent financing to win over recession-weary consumers. So why not mutual fund companies?

You might hope they would trim the expenses they charge to manage your money. After all, it would ease the pain after the beating your investment portfolio has taken lately.

Alas, mutual funds aren’t like the auto business, where dealers are bending over backwards to sell cars.

“That industry is hurting, and they’re not coming back to their customers and saying, ‘You need to bail us out, and we are going to raise prices even though there’s a recession,’ ” said Russel Kinnel, director of fund research at Morningstar Inc.

But the push-pull of supply and demand works differently in the fund industry. When markets tank, the value of the stocks and bonds that mutual funds hold drops. Because fee revenue for fund companies is tied to the value of the assets they manage, their bottom lines suffer when the markets fall.

Sooner or later, something has to give – either the fund company cuts its operating costs, collects more from investors, or both.

Market declines, like the 39 percent drop in the Standard & Poor’s 500 index over the past 12 months, are beginning to trigger mutual fund breakpoints. That’s the industry term for asset thresholds that can either raise the costs investors pay after a market decline, or lower costs after a bull market lifts asset values.

It’s all about economies of scale. Fund companies have certain fixed costs, such as overhead and payroll, that stay roughly the same whatever markets are doing. When companies are managing more money, they’re more efficient and can lower costs.

These days, the reverse is happening. Many funds are now beginning to boost expense ratios, the ongoing charges that investors pay, expressed as a percentage of assets.

The rising expenses that many funds will pass on “are like throwing salt in a wound,” said Lipper Inc. fund analyst Jeff Tjornehoj.

To be sure, many fund companies are sharing some of your pain after the market meltdown. For example, Fidelity Investments recently began cutting 3,000 jobs, or 7 percent of its work force. T. Rowe Price Group Inc. said Wednesday it’s eliminating 288 jobs, or 5.5 percent.

Any investor considering pulling money out of a fund that has boosted expenses should be careful. Keep in mind that there’s far more than expenses to consider when choosing a fund – particularly if an expense increase amounts to just a few bucks a year.

“You shouldn’t obsess over these things, because in most cases we’re talking about a handful of basis points,” Tjornehoj said. “Those do add up for larger investors, but if you’ve lost 30 percent of a fund’s value in the last year, the expense ratio is a minimal part of that. Performance still matters a tremendous amount.”