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Home Policy Priorities Testimony Covered Testimony
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- ICI Comment Letters
Statement of Matthew P. Fink
President, Investment Company Institute
Before the
Subcommittee on Finance and Hazardous Materials,
Committee on Commerce,
United States House of Representatives
On "Improving Price Competition for
Mutual Funds and Bonds"
September 29, 1998
* * * * * * * *
Table of Contents
I. Oral Statement of Matthew P. Fink
A. Competition Among Mutual Funds Is Intense
B. Most Shareholders Invest in Stock Funds That Cost Less Than the Industry Average
C. Why Most Shareholders Own Lower Cost Funds
D. The Total Cost of Investing for Mutual Fund Shareholders is Declining
E. Economies of Scale are Shared With Mutual Fund Investors
V. Disclosure And Regulation Are Working
A. Mutual Fund Fees Are Prominently Disclosed in a Uniform and Concise Manner
B. Formal Disclosure of Mutual Fund Fees Is Reinforced In Several Important Ways
C. Mutual Fund Fees Are Strictly Regulated
D. Mutual Fund Disclosure and Regulation Is Unmatched By Other Investment Products
Appendix I: "The Organization and Operation of a Mutual Fund"
Appendix II: ICI Investor Awareness Series: "Frequently Asked Questions About Mutual Fund Fees"
* * * * * * *
I. Oral Statement of Matthew P. Fink
Thank you, Chairman Oxley and Members of the Subcommittee. I appreciate the opportunity to testify before the Subcommittee to address how competition is affecting the total cost of investing in mutual funds.
If I were to make just one point today, it would be this. Competition is working in the interest of investors. Americans can choose from more than seven thousand mutual funds offered by more than four hundred and fifty fund companies. And competition doesn't end there. Americans have many other places to invest their money, including individual stocks and bonds, and a variety of insurance and bank products.
Mutual funds fiercely compete to attract and earn the loyalty of investors. Indeed, mutual funds compete on many levels, including performance, investment philosophy, experience, specialized expertise, and service.
And let there be no doubt in anyone's mind—mutual funds compete vigorously based on price.
Most discussions of mutual fund fees focus on funds that invest in stocks, so I will concentrate on that half of the market.
It has been widely reported that the average stock fund charges fees at an annual rate of about 1.5 percent.
What is less well known is that the average investor pays just under 1 percent—far less than what the average fund charges. In other words, the average shareholder owns funds whose annual fees are 36 percent lower than the industry average.
As illustrated in Exhibit 1, more than three-quarters of all investor accounts are in lower-cost funds—funds that charge less than the industry average.
These numbers indicate that the market readily enables investors to find lower cost funds. In short, the market is working effectively to serve the interests of millions of shareholders.
There are several likely explanations why so many investors own low-cost mutual funds.
In testimony on Capitol Hill, Institute President Matthew P. Fink
discusses why so many investors own low-cost mutual funds.
First, information about mutual fund fees is widely and readily available. Table 2 is a slightly abridged illustration of the fee table that must be included at the front of every fund prospectus.
I would first direct your attention to the line that says Total Annual Fund Operating Expenses. This figure is based on a formula devised by the SEC. The formula produces a simple number that investors can use to compare the costs of funds. You might also look at the example set forth at the bottom. It shows the impact that the fund's total fees would have on a hypothetical $10,000 investment, expressed in dollar terms over four different periods. Again, this provides investors with valuable information that promotes informed comparisons from fund to fund.
A second reason so many investors own low-cost funds is probably due to a quantum increase in investor education. Chairman Levitt deserves special credit for launching a national investor awareness campaign. In addition, there are an enormous number of magazines, newspaper columns, websites, and newsletters focused on mutual fund investing, including fees.
A third reason millions more investors are in low-cost funds probably results from their efforts to find strong performing funds. Mutual fund performance figures are strictly regulated. The law requires that fund performance be reported after it is adjusted downward to account for fees. If a fund's fees are higher than average, the downward adjustment to its performance will be higher. Similarly, the widely used Morningstar rating system considers fee levels when assigning "stars." It has been reported that up to 80 percent of new investments are in funds with four or five stars. Investors may thus be ending up in lower cost funds because they focus on funds with high ratings.
Finally, investors may be in lower-cost funds because of economies of scale. Many stock funds automatically reduce fee rates when certain levels of fund assets have been reached. One report estimates that three-quarters of all stock funds have such breakpoints.
A number of surveys indicate that many investors are unaware of the specific components and details of fund fees. This is not surprising. Few of us know the details of myriad things in life, but we do tend to know what is important. As Chairman Levitt's testimony suggests, the crucial question is whether investors understand how fees can affect their bottom lines.
The evidence—which shows that 77 percent of investor accounts are held in low cost funds—speaks powerfully. The evidence indicates that many investors do understand the impact of fees on their fund investments.
Although we are gratified that so many investors appear to be developing appropriate sensitivity to fees as an element of informed investing, it hardly means our job is complete. The challenge of educating investors—about fees and the other important elements of mutual fund investing—is a continuing responsibility. But just as there is no magic pill that will produce instant good health, there is no magic regulation that will produce instant investor awareness.
The mutual fund industry remains fully committed to working with Congress, the SEC, and others on a variety of investor education efforts. We stand ready to consider measures that promise to improve investor awareness, including the understanding of fees.
Thank you very much.
II. Executive Summary
The American mutual fund industry is highly competitive. Mutual funds are economical and affordable investments that (1) provide extraordinary value to more than 62 million investors, (2) help democratize our financial markets, and (3) facilitate the capital formation process by supplying capital for productive enterprises and enhancing American competitiveness.
My testimony describes the following key points:
Competition is Working. A substantial majority of investors own stock mutual funds that charge lower fees than the industry average. In fact, the average investor owns fund shares whose fee levels are 36% lower than the industry average. Because of the sheer number of competitors, stringent government regulation, clear disclosure, low barriers to entry, and heavy scrutiny by the media, the mutual fund marketplace provides a near textbook example of a competitive market structure. These factors also appear to have contributed to a decline in the total costs of investing in mutual funds over the last two decades.
Disclosure is Working. SEC regulations governing mutual funds require that fees be prominently disclosed in a standardized, easy-to-use table at the front of every fund prospectus. No other financial product is subject to such comprehensive fee disclosure rules nor provides such understandable information. Earlier this year, the SEC further improved the fee disclosure system after undertaking field testing to determine investor preferences. The mutual fund industry supported every element of the SEC's initiative.
Regulation is Working. Comprehensively reviewed and modernized by this Committee just two years ago, the Investment Company Act of 1940 protects investors by prescribing how a mutual fund must conduct business, including limits and special procedures relating to fees. Forbes magazine once called this law "one of the world's most perfect legal documents."
Corporate Governance is Working. Mutual fund directors – including the fund's independent directors – have unique responsibilities, including the obligation to monitor and carefully review the most important mutual fund (advisory and 12b-1) fees on a regular basis. Fund directors are fiduciaries; their review must be conducted in a way that serves the best interests of shareholders. The most important mutual fund fees cannot be increased unless the fund's independent directors and the fund's shareholders vote to do so.
Economies of Scale Are Shared With Fund Investors. Directors at many mutual fund companies can implement policies that automatically reduce management fee rates when assets grow to a certain level (e.g., fee rates drop by 5% as soon as assets reach a $1 billion "breakpoint"). One report estimates that 75% of all equity mutual funds have such breakpoints.
The Fund Industry Works Hard to Educate Shareholders About the Costs of Mutual Fund Investing. The industry supports the clear and prominent disclosure of all mutual fund fees. The Institute's latest investor awareness brochure – one in a continuing series – focuses on the importance of mutual fund fees as one of several elements of an informed investment decision. We believe the tools investors need to evaluate mutual fund fees are in place. The challenge is to help investors use those tools to make informed investment decisions.
Mutual Fund Fee Disclosure Is Unmatched in the 401(k) Market. Participants in 401(k) plans have uneven and inconsistent access to information about the costs of their various investment options. Mutual funds provide clear disclosure of costs, but other financial products do not. The Institute supports regulation that would require that all 401(k) participants receive full information regarding the fees charged by all investment options.
The mutual fund industry consistently has supported the SEC's efforts to improve fee disclosure, has called for improved fee disclosure in the 401(k) market, and taken the lead on many investor education efforts. We continue to explore ways to improve investor understanding about fees and stand ready to work with all to accomplish that goal.
III. Introduction
My name is Matthew P. Fink. I am pleased to appear before the Subcommittee today to discuss how competition and disclosure are affecting the total costs to investors of purchasing and owning mutual funds.
I am President of the Investment Company Institute, the national association of the American investment company industry. The Institute's membership includes 7,288 mutual funds, 450 closed-end funds, and 9 sponsors of unit investment trusts. The Institute's mutual fund members manage about $5.1 trillion on behalf of more than 62 million individual shareholders and 37% of American households.
Mutual funds are economical and affordable investments that provide significant value to millions of American families. Mutual funds have democratized our financial markets in ways that were virtually unimaginable just a generation ago. Because of mutual funds, tens of millions of middle-income Americans benefit from professionally managed and diversified investment portfolios – services that might otherwise be available only to the wealthy, indirect shareholders in most of the nation's public companies. As investors use mutual funds to meet future needs, such as providing for a secure retirement or for a child's higher education, fund shareholders are also helping the country meet its future needs by supplying capital for productive enterprises.
My testimony describes the following key points:
Competition is Working. A substantial majority of investors own stock mutual funds that charge lower fees than the industry average. In fact, the average investor owns fund shares whose fee levels are 36% lower than the industry average. Because of the sheer number of competitors, stringent government regulation, clear disclosure, low barriers to entry, and high scrutiny by the media, the mutual fund marketplace provides a near textbook example of a competitive market structure. These factors also appear to have contributed to a decline in the total costs of investing in mutual funds over the last two decades.
Disclosure is Working. SEC regulations governing mutual funds require that fees be prominently disclosed in a standardized, easy-to-use table at the front of every fund prospectus. No other financial product is subject to such comprehensive fee disclosure rules nor provides such understandable information. Earlier this year, the SEC further improved the fee disclosure system after undertaking field testing to determine investor preferences. The mutual fund industry supported every element of the SEC's initiative.
Regulation is Working. Forbes magazine once called the law that governs mutual funds – the Investment Company Act of 1940 – "one of the world's most perfect legal documents." Comprehensively reviewed and modernized by this Committee just two years ago, the law protects investors by prescribing how a mutual fund must conduct business, including limits and special procedures relating to mutual fund fees.
Corporate Governance is Working. Mutual fund directors – including the fund's independent directors – have unique responsibilities, including the obligation to monitor and carefully review the most important mutual fund fees on a regular basis. Fund directors are fiduciaries; their review must be conducted in a way that serves the best interests of shareholders. The most important mutual fund fees cannot be increased unless the fund's independent directors and the fund's shareholders vote to do so.
Economies of Scale Are Shared With Fund Investors. Directors at many mutual fund companies can implement policies that automatically reduce management fee rates when assets grow to a certain level (e.g., fee rates drop by 5% as soon as assets reach a $1 billion "breakpoint"). One report estimates that 75% of all equity mutual funds have such breakpoints.
The Fund Industry Works Hard to Educate Shareholders About the Costs of Mutual Fund Investing. The industry supports the clear and prominent disclosure of all mutual fund fees. The Institute's latest in a series of investor awareness brochures focuses on the importance of mutual fund fees as one of several elements of an informed investment decision. We believe the tools investors need to evaluate mutual fund fees are in place. The challenge is to help investors use those tools to make informed investment decisions.
Mutual Fund Fee Disclosure Is Unmatched in the 401(k) Market. Participants in 401(k) plans have uneven and inconsistent access to information about the costs of their various investment options. Mutual funds provide clear disclosure of costs, but other financial products do not. The Institute supports regulation that would require that all 401(k) participants receive full information regarding the fees charged by all investment options.
Each of these points is discussed in detail in the testimony that follows.
IV. Competition Is Working
If I were able to make only one point to the Subcommittee today, it would be this. Competition is working effectively in the interests of investors. Mutual funds compete vigorously for investor dollars, there are low barriers to entry into the fund business, the industry is not concentrated, and the total costs of investing are declining. Perhaps the most compelling indication is in many ways the most obvious. A substantial majority of mutual fund investors own stock funds (also known as "equity" funds) that charge lower fees than the industry average.
A. Competition Among Mutual Funds Is Intense.
The mutual fund industry is intensely competitive. Fund companies compete in a variety of ways, including on the basis of fees and costs.1 In fact, some highly successful mutual fund companies contend that low costs are one of their principal competitive advantages. Other funds focus on the services they provide investors, their history of strong performance, or their expertise in specialized markets or investment techniques. When combined with strong regulatory oversight and a system of full disclosure, the result is vigorous competition among funds and a bounty of diverse choices for investors.
1. The Fund Industry Has Low "Barriers to Entry."
As of July 1998, U.S. investors could choose from more than 7,300 mutual funds, offered by an estimated 512 different fund companies.2 As these figures suggest, the fund industry is characterized by low barriers to entry. Unlike banks, for instance, a mutual fund does not have to be "chartered" by a state government or a federal agency before it can begin to operate. And compared to most other businesses, the start-up costs for a mutual fund are quite low.3 Such low barriers to entry are a crucial element of a competitive market. Basic economic theory holds that if mutual fund fees were to exceed the level expected in an efficient market, low barriers to entry in the industry would increase the likelihood that new, lower-cost entrants would enter the market.
Recent technological and business innovations suggest that barriers will remain low and may fall further. On the technological side, this Subcommittee recently heard testimony from several experts that the Internet's promise as an entirely new way to sell mutual funds has begun to be realized.4 And the development of mutual fund "supermarkets" has enhanced competition by allowing even very small mutual funds to gain access to extensive distribution systems. In part for these reasons, there were 485 more mutual funds in existence in 1997 than there were the year before.5
2. The Mutual Fund Industry Is Not Concentrated.
When analyzing the competitiveness of a particular industry, a key focus is whether market share is concentrated among just a few firms, or dispersed among many. The market shares of fund companies listed in Table 1 provide powerful evidence that market share in the mutual fund industry is not concentrated.
Table 1
|Estimated Market Shares of the Top TwentyMutual Fund Companies as of July 30, 1998
|Fidelity Investments
|The Vanguard Group
|Capital Research & Management
|Merrill Lynch Asset Management
|Putnam Funds
|Franklin Templeton Group of Funds
|Morgan Stanley Dean Witter Advisors
|AIM Group/INVESCO Funds
|Salomon Smith Barney
|Oppenheimer Funds/Mass Mutual
|Scudder Kemper Investments
|American Express Financial Advisers
|Dreyfus Corporation
|T. Rowe Price
|Federated Investors
|Prudential Mutual Funds
|Alliance Capital Management
|Janus/Berger Funds
|American Century Investments
Source: Investment Company Institute
Similarly, an Institute study published earlier this year indicated that the market share of the top twenty mutual funds has fallen since 1984.6 Declines were also evident when the measurement was limited to the top five and top ten firms.
The fund industry also passes the test used by the U.S. Department of Justice to make a determination of whether an industry might be excessively concentrated. The Department of Justice uses an index to measure market concentration by industry, with 1 being the least concentrated, 10,000 the most concentrated, and 1800 to indicate the possibility of excessive industry concentration. As of May 31, 1997, the mutual fund industry had an index number of 329.7
B. Most Shareholders Invest in Stock Funds That Cost Much Less than the Industry Average.
Much of the recent focus on mutual fees has been on equity funds, so I will likewise concentrate on that part of the industry. Equity mutual funds comprise about one-half of all fund assets. There are currently 3,364 equity funds from which shareholders can choose.8 As illustrated in Exhibit 1, a simple average of these funds' annual fees, expressed as a percentage of fund assets (commonly called the "expense ratio") equals approximately 1.52 percent.
But if you look at equity mutual fund fees from the perspective of where investors actually invest their money, a dramatically different picture emerges. As illustrated in Exhibit 1, the overwhelming majority of shareholders' equity fund accounts (77%) are found in mutual funds that charge annual fees below the simple average of 1.52 percent.
Exhibit 1
Most Investors Own Lower Cost Stock Funds
Indeed, based on calculations made from data collected by Morningstar, a widely quoted fund research service, the average dollar invested in equity funds by investors accrues an annual fee at the rate of 0.97 percent.9 In other words, the average shareholder account is in a mutual fund whose annual fees are 36 percent lower than the simple industry average.
When we look at how much shareholders have invested in these accounts, the preference for lower cost mutual funds becomes even more dramatic. Based again on calculations we performed using Morningstar data, and as illustrated in Exhibit 1-a, we estimate that 84.7 percent of all equity fund investments are in funds with an expense ratio below 1.52 percent.
Exhibit 1-a
Most Stock Mutual Fund Assets Are In Lower Cost Funds
We believe it is extremely significant that so many equity fund investors pay far less than the average fund charges. In our judgment, this indicates that the market readily enables investors to own lower-cost mutual funds – and that most of them do.
C. Why Most Shareholders Own Lower Cost Funds.
Discussions about trends in equity mutual funds involve thinking about tens of millions of investors and thousands of funds, many with varying investment styles. Thus there is unlikely to be any single explanation for why such a clear preference for lower cost funds has emerged. Nevertheless, we believe that these figures lead to several possible explanations.
1. Information About Fees Is Widely Available.
One possible explanation for the fact that the fees paid by an average equity fund investor are lower than the "simple average" of equity fund expense ratios is that investors, based on the information available to them, are choosing to invest in lower-cost funds. Indeed, there are strong indications that this is in fact the case.
Shareholder research surveys conducted by the Institute confirm that fees are generally one of three items most likely to be considered before a shareholder invests in a new mutual fund (along with performance and risk).10 This research also found that a significant proportion of investors gather information on fund fees before investing. As will be described in Section V, information about fund fees is readily available, both in the SEC-mandated fee table at the front of the prospectus, and from extensive independent publications. Many of these publications stress the relevance of evaluating fees as part of the process of making an informed investment decision. Thus, it is not surprising that two prominent economists recently concluded that "[c]onsumers are fee-sensitive in that lower-fee funds, and funds that reduce fees, grew faster."11
Investors also appear to prefer lower costs in the case of loads (i.e., sales commissions). As is discussed further below, funds are permitted to charge loads of up to 8.5 percent of the purchase price. But very few funds have loads equal to the maximum. In fact, about one-third of all mutual funds don't charge loads or sales commissions of any kind. And even among firms that charge initial sales loads, the average charge is between 4 and 5% – only about half the legally permitted amount.
2. Performance Must Be Adjusted To Account For Fees.
Perhaps the most obvious reason why so many investors are in lower-cost funds is their desire to find funds that provide consistently strong performance. What is little understood is that when mutual funds report their performance – whether directly to shareholders in reports or in advertisements – is that the law requires that performance be reported only after it is adjusted downward to account for annual fees. If a fund's fees are higher than average, the downward adjustment to the fund's performance will also be larger than average. As a result, investors that focus on a fund's performance also are indirectly considering the level of the fund's fees.
The star rating system employed by Morningstar that is frequently cited in the press and fund advertising also incorporates fund costs when assigning its "stars." The star rating system thus appears to favor funds with low expense ratios and either low or non-existent sales charges. Independent researchers have concluded that in recent years, up to 80 percent of all net new equity fund investments have been made in funds that were awarded one of Morningstar's two highest ratings.12 A result is that many investors are ending up in lower cost equity mutual fund investments.
Finally, the economies of scale that have been realized among older funds that have experienced growth may have resulted in most investors owning lower cost funds. Economies of scale are discussed in more detail below.
D. The Total Cost of Investing for Mutual Fund Shareholders is Declining.
Several independent studies demonstrate that overall, the total cost of investing in mutual funds has steadily declined. To appreciate these studies, it is important to describe the two most important types of mutual fund costs.13
1. The Two Key Elements of Total Cost: Sales Charges and Annual Fees.
The most significant costs paid by mutual fund investors fall into two distinct categories. First, many funds have sales charges (or "loads"). These are transaction-based costs usually paid to a broker who has bought fund shares on a client's behalf. As is noted above, rules enacted under the securities laws cap loads at 8.5% of the amount the shareholder is investing.14
As in other industries, sales charges generally compensate the salesperson, but do not typically defray in any way the costs and expenses of the underlying product. Thus, there is a second category of mutual fund costs. This category includes annual fees paid by the fund (and thus indirectly by the investor). These fees compensate the various entities that manage the fund's investment portfolio and provide essential services to the fund and its shareholders. Among these services are some that are highly visible to shareholders (e.g., toll free 24 hour phone access, account statements, etc.) and some that are not (e.g., independent custodianship of the fund's securities). The total annual fees charged by the fund, expressed as a percentage of the fund's assets, are aggregated in a standard formula and reported as the fund's "expense ratio."
Many investor and consumer advocates believe that if investors look at whether a fund charges a load and review its expense ratio, they will develop a reasonable understanding of the total cost of investing in mutual funds.15 As is discussed in Section V below, to facilitate the use and understanding of this information, the SEC requires that both of these figures be clearly disclosed in the fund's fee table, which must appear at the front of the prospectus.
2. How Competition Is Affecting Sales Loads.
The use and level of sales loads have decreased substantially over the past two decades. A 1994 study conducted by the Division of Investment Management at the SEC confirmed this finding. The study found that the average maximum sales charges for funds with front-end loads fell from 8.5 percent in 1979 to 4.75 percent in 1992.16 Another study by a leading independent mutual fund research firm reported that over the course of ten years, the average mutual fund that charged an initial sales load had cut its maximum load nearly in half, decreasing it from 8.5 percent to between 4.5 and 5.5 percent.17
The sharp decline in up-front sales loads did not occur in isolation. This decline happened at least in part because of a trend toward new, more innovative methods of compensating the brokers who sell mutual funds. These new methods often involved combining a new type of annual fee with a reduced up-front sales load.
Finally, although all mutual funds are permitted to charge loads, many funds choose not to do so, and are designed instead for individuals who do their own investing rather than relying on professional advisers. These funds are typically sold directly by fund companies to do-it-yourself investors, and are generally referred to as "no load" funds. Approximately 33 percent of all equity mutual funds do not charge loads.
3. How Competition Is Affecting Annual Fees.
While sales charges have noticeably declined, the trends are less dramatic for annual fees. This is not surprising – fund-level fees are affected by a variety of different factors. On the one hand, there are strong competitive pressures to reduce fees. As is discussed above, many investors appear to take fee levels into account when making investment decisions. And even more investors and investment professionals consider performance records; anything that detracts from performance will be scrutinized carefully, and fund fees are no exception.18
At the same time, however, there is substantial competitive pressure to provide enhanced and sometimes costly new services to shareholders. Many funds have capabilities that provide investors 24-hour access to account information by phone or over the Internet, as well as access to staff with detailed knowledge of all of the company's investment products. Increasingly, funds have upgraded their technologies to the point where investor transactions can be securely conducted via websites.
Internet and toll free phone access are just one part of the growing menu of services fund companies provide. Others include an extraordinarily broad range of free educational materials about investing, about retirement planning and saving, and about the financial markets. To provide just one illustration, the Roth IRA recently enacted by Congress may provide an attractive investment opportunity for many individuals who qualify for it. But for some, the rules may seem quite complex. Many fund companies respond to this by providing planning kits and easy-to-use worksheets to help investors understand how this program works.
In addition, any analyses of trends in mutual fund expense ratios must be adjusted to take into account shifts in investor preferences. For example, in 1997, equity fund investors showed much greater interest in higher-cost international funds than they had ten years earlier. International funds represented 8.8 percent of all equity fund assets in 1997, more than double the share they enjoyed in 1986.19 Several categories of equity funds with relatively lower costs declined in popularity over the same period.
Changes in the way investment professionals are compensated also have influenced trends in fund expense ratios. Twenty years ago, most mutual funds were sold through a broker with an initial sales load. Other funds were sold directly by the fund company to investors without a load.
That all changed in the mid-1980s. Initial sales loads declined in popularity in favor of a new type of sales commission and marketing fee that could be collected annually. Known as a 12b-1 fee (after the SEC rule that permits it), this charge in effect serves as a partial substitute or replacement for the traditional initial sales load by permitting investors to, in effect, pay the sales load gradually over time. Its introduction allowed significant innovations in how funds could be sold to investors. These plans give investors a range of choices about how to pay sales charges for their fund investments. They could continue to pay an initial load, they could pay a small part of the commission each year for several years, or they could pay the commission when they decided to redeem their shares. These options, which are described in greater detail in Appendix II, can result in investors choosing the alternative with the lowest overall costs, given their planned investment horizons.
There are important differences between 12b-1 fees and the loads they often replaced. First, loads are not included as part of a fund's expense ratio. 12b-1 fees, however, are included in the expense ratio. Because 12b-1 plans have grown in popularity over the last fifteen years, a statistical analysis that attempts to compare expense ratios during different years in this period runs the risk of being highly distorted. If all other factors were held constant, the adoption of 12b-1 plans by funds would have the following two effects on statistics about costs. First, it would show a decline in initial sales loads. Second, it would show an increase in expense ratios.
The SEC has noted on several occasions that some studies and reports fail to account for this major structural change when examining the total costs to shareholders of investing in mutual funds. For example, the SEC noted in a May 1997 submission to Congressman Edward Markey that "[w]e have reservations about certain of the data published to date on trends in fund fees. For example, some reports appear not to have taken into account changes in the load structure of mutual funds over time."20 Similarly, in 1992 correspondence to the Committee, the SEC staff expressed its view that "recent media coverage may not take into account a number of factors influencing fee levels," and that some media coverage "oversimplifies the analysis of mutual fund fees."21
To be credible, any study that looks at trends in mutual fund costs must address the changes produced by the shift from initial loads to 12b-1 plans. One way to address the effects of this shift is to examine changes in expense ratios in conjunction with changes in sales charges. An alternative would be to study the trend in expenses ratios while excluding the costs of 12b-1 plans. This would provide a more accurate picture of trends with respect to management and administrative fees, two key elements of the expense ratio.
Different independent studies have employed different methods in evaluating costs. In each case, the results support the conclusion that the total costs of investing borne by shareholders are declining.
In one of these studies, Professors Erik Sirri and Peter Tufano looked at a combination of sales loads and expense ratios. Their research found that the total costs of fund ownership declined between 1970 and 1989 because of sharp reductions in sales loads.22 A report by the independent consulting firm CDA-Weisenberger reached the same conclusion for a different time period. This report noted that although expense ratios increased between 1951 and 1991, the total costs to mutual fund shareholders with holding periods of 10 years or less actually fell. As with the previous study, they attributed this decline to dramatic reductions in sales loads.23
In another detailed study, Lipper Analytical Services examined trends in expense ratios after backing out 12b-1 fees. The Lipper study found that the median expense ratio for funds that began operations in 1986 or before has declined by 3% between 1986 and 1996.24 Finally, and most recently, Strategic Insight, another independent consultant, examined expense ratios while excluding any 12b-1 charges. Their study concluded that in 1997 expense ratios for equity funds had declined between 4 and 5 percent from the year before.25
4. Mutual Funds Cost Much Less than Similar Financial Products.
Although there may be some differences in the services provided and accounting practices, most experts agree that mutual funds cost less than other managed investment products – in most cases, much less. Here are a few examples.
a. Hedge funds – These are private investment pools, which have virtually no restrictions on the types of investments they can make or the investment strategies they can utilize. Because of their enormous potential risk, they can be legally offered only to wealthier, more financially sophisticated investors. Overall, hedge funds have vastly higher costs than mutual funds. The Lipper report found that hedge funds generally charge a minimum base annual fee of 1%, plus up to 20% of profits.26
b. Commodity Pools – These are pooled investments that consist of interests in various commodity contracts, such as precious metals or agricultural products. Based upon data provided by the Commodities Futures Trading Commission, the median expense ratio for commodity pools in 1995 was approximately 5.06 percent.27 This is five times higher than the expense ratio paid by a typical equity mutual fund investor.
c. Wrap accounts – Wrap accounts are a service provided by some firms that offer to aggregate all of a client's investments into a single account. The annual fee to maintain and service this account is generally between 1% and 3%, according to the Lipper report, a much higher range than mutual funds.28 The wrap account fee is also charged in addition to any charges that may be associated with the underlying investments.
While these examples are not exhaustive, they do highlight the fact that mutual fund investment costs are generally far lower than any of these other managed products.
5. American Mutual Funds Cost Much Less than Overseas Funds.
The total costs of U.S. mutual funds also appear to be significantly lower than the costs charged by mutual funds that operate in Canada and Europe. For example, the Lipper study reported that long-term Canadian funds charge fees at nearly double the rate of their U.S. counterparts.29 Studies comparing American and Europeans mutual fund costs have reached similar conclusions. U.S. funds are substantially less expensive than funds sold in Europe. For example, a study of comparable advisory fees found that European funds had fees that were almost double those charged in the U.S.30 The Lipper study examined a similar issue, and found that the average management fee for U.S. equity funds was lower than the average fee in 19 of the 21 European countries that were surveyed.31
We think it is also worth bearing in mind that foreign funds generally operate in a much less strict regulatory environment than exists in the U.S. For example, despite the possible conflicts of interest, many foreign jurisdictions do not restrict transactions between the fund and its affiliates to the same degree that the Investment Company Act does. Thus, in addition to the higher fees they collect, the advisers to funds in these jurisdictions have opportunities to profit from relationships with a fund that are generally prohibited in the U.S.
E. Economies of Scale are Shared With Mutual Fund Investors.
As commonly used, the term "economies of scale" refers to the expectation that a growing fund should be able to spread certain fixed costs across a larger asset base, resulting in a declining expense ratio. In fact, the fee structures of many funds have been specifically designed to pass along economies of scale by means of "breakpoints." These breakpoints result in automatic reductions in certain key fees when the fund grows beyond a certain size. As noted above, this may be one reason why most equity fund investors own shares in equity funds that have an expense ratio that is less than the simple average.
1. The Use of Breakpoints in Mutual Fund Management Fees.
Directors at many mutual fund companies have approved policies that establish "breakpoints" in mutual fund fee schedules. Breakpoints refer to a specific level of asset growth, and provide that when this level is achieved, the management fee rate will be reduced by a predetermined amount, such as five or ten percent. Many of the largest fund companies have implemented these automatic fee reduction policies and share economies of scale with their shareholders. A recent survey confirmed this development.
"Over the past few years, fund companies have become much more proactive in controlling fees than they had been previously, instituting asset-based breakpoints in their funds' fee structures. Approximately 75% of all funds surveyed have a breakpoint in place, which will decrease a fund's management fee as its average assets increase in size."32
Thus, it is not surprising that a variety of independent studies have found that as individual funds grow, their expense ratios tend to fall33 and that mutual funds exhibit economies of scale.34
2. Common Misconceptions About "Economies of Scale."
Ironically, mutual funds have been criticized for not passing economies of scale on to investors. This criticism is based upon a fundamental misconception – that economies accrue to an entire industry that has grown, rather than to an individual firm. A set of simple examples demonstrates why this is wrong.
Imagine an industry with five mutual funds, each managing one million dollars. In one year, the industry doubles in size, growing from five million to ten million dollars. The question is then raised: are there economies of scale that reduce marginal costs and can be passed on to shareholders? The answer is that it depends on what caused the growth:
- If the industry doubled in size only because ten new funds were created, no economies of scale would be realized. In fact, because of start-up costs and related expenses, the "simple" average of industry expense ratios would likely increase.
- If the industry doubled in size because five new funds were created, each of which had one million dollars in assets, no economies of scale would be realized. In fact, costs could increase in the short term if it now costs a fund more (because of more competitors) to attract additional assets.
- If only one of the five funds was responsible for all of the new growth (one fund grew to six million in assets; the other four remained at one million), then only the growing company would be expected to experience economies of scale.
- If all five funds grew, but all of their growth was attributable to the opening of new accounts (rather than the growth of existing accounts), relatively small economies of scale might be expected.
- If all five funds grew, and all of their growth was attributable to the growth of existing accounts (and no new accounts were established), significant economies of scale could be realized.
Operating a mutual fund is a vastly more complex enterprise than these simple illustrations might suggest. But the illustrations do point out that the intuitive expectation that some people have – that is, that rapid growth should by itself lead to an industry-wide reduction in fees – is mistaken. The recent study of fees conducted by Lipper Analytical Services emphasized this point.
"The misunderstanding about the nature of economies of scale begins with the expectation that the tremendous growth in the asset size of the fund industry should translate into a reduction to the average industry expense ratio. This expectation presumes an industry economy of scale, which does not exist. The fund industry does not have any economies of scale, individual funds do."35
Lipper's observation has been confirmed repeatedly in practice: as individual funds grow, their expense ratios tend to fall. Many funds clearly share the benefits of lower operating expenses with their shareholders through breakpoints that automatically reduce certain key expenses as assets grow.
V. Disclosure and Regulation Are Working
A. Mutual Fund Fees Are Prominently Disclosed in a Uniform and Concise Manner.
The fact that the fund industry is so competitive is attributable in large measure to the clear disclosure provided to investors about each mutual fund being offered. The disclosure is unmatched by that of any similar financial product, as discussed in greater detail in Section D below. The federal securities laws require that fund companies provide each investor with a prospectus at or before the time the investor buys shares. In addition to information about, among other things, a fund's investment objectives and policies, the risks of investing in the fund, the fund manager, and how to purchase and redeem shares, the prospectus must provide full disclosure of all mutual fund fees and costs in a simple, straight-forward manner.
Institute President Matthew P. Fink discusses the standardized
disclosure of mutual fund fees in the fee table at the front of every
The principal source of information about mutual fund fees in the prospectus is the fee table. The fee table was first adopted by the SEC in 1988. Under recent changes to the rules governing mutual fund prospectuses (see Table 2), the fee table is now included as part of a "risk-return summary" that must appear in the front of every prospectus. The risk-return summary also describes the investment objectives, strategies, and risks and performance.36
Table 2
The Fee Table Required by Federal Law
Hypothetical Example
|This table describes the fees and expenses that you may pay if you buy and hold shares of the fund.
|Shareholder Fees(fees paid directly from your investment)
|Maximum Sales Charge (Load) Imposed on Purchases(as a percent of offering price)
|Maximum Deferred Sales Charge (Load)
|Maximum Sales Charge (Load) on Reinvested Dividends
|Redemption Fee
|Annual Fund Operating Expenses(expenses that are deducted from fund assets)
|Management Fees
|Distribution (12b-1) Fees
|Other Expenses
|Total Annual Fund Operating Expenses (Expense Ratio)
|This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds.The example assumes that you invest $10,000 in the fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
|After 1 year
|After 3 Years
|After 5 Years
|After 10 Years
The fee table presents information about fees in a uniform format. It also discloses the fund's overall expense ratio. In addition, the fee table includes an example that illustrates the effect of fund expenses on a hypothetical investment over time. The example is designed to enable investors to readily compare two or more funds because it presents an "all-in" figure that takes into account both sales loads and annual fees and is expressed as a dollar amount. The SEC's recent changes to the mutual fund prospectus included revisions to the fee table, such as increasing the amount of the investment used in the hypothetical example from $1,000 to $10,000, which is more representative of a typical investment.37
At the same time it revised the mutual fund prospectus, the SEC adopted a rule authorizing optional use by mutual funds of a new disclosure document called the profile.38 A profile summarizes key information about the fund in a standardized format.39 The profile must include the risk-return summary section of a fund's prospectus, including the fee table. An investor who receives a profile will have the option of buying the fund shares before receiving a prospectus or requesting a copy of the full prospectus.40 An investor who purchases fund shares based on the profile must receive the fund's prospectus with the purchase confirmation.41
Earlier this year, the SEC also made another significant change to the mutual fund prospectus by adopting a new rule to require that the cover page, risk-return summary (including the fee table) and risk factor sections of a fund prospectus be written in plain English.42 The plain-English standard also applies to the entire profile.
The plain-English requirements should help enhance investors' understanding of mutual fund fees and the impact of such fees on fund performance. In fact, the Director of the SEC's Division of Investment Management recently was quoted as saying that regulators have "been aggressive about tackling the fee issue with the SEC's most recent efforts focused on providing better disclosure through 'plain-English' prospectuses, clearer fee tables and graphics."43
B. Formal Disclosure of Mutual Fund Fees Is Reinforced In Several Important Ways.
1. Performance Figures And Independent Ratings Adjust For Fees.
Pursuant to SEC rules, mutual fund performance information must take into account all fund fees and expenses. Money market funds advertise their performance using standardized seven-day current and effective yield quotations, while other mutual funds use standardized one, five, and ten-year total return quotations (which may be accompanied by standardized thirty-day yield quotations). Further, all standardized performance numbers must be shown net of fees (i.e., fees must be deducted from gross returns). Thus, mutual fund fees are fully accounted for in advertisements containing mutual fund performance, because the standardized performance figures are required to net out fees.
Moreover, returns net of fees are a common means of reporting performance information about mutual funds. For example, Morningstar's "star rankings" utilize a risk-adjusted performance measure. The performance is net of all fees and expenses.44 Popular magazines, such as Barron's, Business Week, Money and Forbes, also report performance net of fees and expenses.
2. Advice and Guidance About Fund Fees Is Widely Available.
The clear disclosure of fees in mutual fund prospectuses and advertisements results in information being widely available to the general public. In addition, there are many other sources of information about mutual funds available to investors. In fact, Institute research shows that investors obtain this information more often from brokers and financial advisers, newsletters, newspapers and magazines than from the fund's prospectus.45
For example, an investor can learn about fees charged by a particular fund by reviewing the mutual fund listings published daily in most newspapers. Several national and daily financial newspapers also include a listing of fund expense ratios on a weekly basis. A newspaper's listings offer information about a fund's fees by using a series of symbols next to the fund's name.
In addition, many of these publications actively encourage investors to examine fee tables and to evaluate fees as an important part of making investment decisions.Indeed, as of September 25, 1998 more than 80% of on-line respondents to a Money Magazine website survey correctly answered a question about the impact of fees on mutual fund performance.46 Although this is obviously not a scientific survey, it does suggest that when investors make use of the many educational resources available about funds, they can develop a sound understanding of how fund fees can affect their investment.
C. Mutual Fund Fees Are Strictly Regulated.
In general, industries that are competitive and in which fees are fully disclosed are not considered to be in need of additional regulation with respect to fees. Yet mutual funds are subject to strict regulation of fees under the federal securities laws. This regulation includes a combination of substantive limits and controls by fund boards of directors and shareholders, and acts as an added check.
1. The NASD Limits Sales Charges and 12b-1 Fees.
The Investment Company Act requires a mutual fund to restrict its sales charges to limits established by the NASD. NASD rules provide that total front-end and/or deferred sales loads may not exceed 8.5 percent of the offering price, although most funds charge far less than the maximum. In 1993, the NASD amended its rules to apply its limits on sales charges to 12b-1 fees. Under these rules, 12b-1 fees are limited to a maximum of 1.00 percent of the fund's average net assets per year, which may include a service fee of up to 0.25 percent to compensate sales professionals for providing services or maintaining shareholder accounts. In addition, the NASD rules restrict the aggregate amounts that can be charged under a Rule 12b-1 plan to a level based upon a percentage of sales of the fund's shares. Finally, the NASD's rules prohibit a fund with a 12b-1 fee of more than 0.25 percent from being marketed as a "no-load" fund.
2. Fund Directors Carefully Monitor Certain Key Fees.
a. The Advisory Fee. The Investment Company Act imposes substantial responsibilities on fund directors in connection with any advisory contract entered into by the fund. Among other things, the advisory contract must describe all compensation to be paid to the adviser. Both the board as a whole, and a majority of the fund's independent directors, must review and approve the contract on an annual basis. Section 15(c) of the Investment Company Act imposes a duty on fund directors to request, and upon the adviser to provide, information reasonably necessary to review the terms of the contract, including the advisory fee.
Section 36(b) of the Investment Company Act also provides that a fund's adviser has a fiduciary duty with respect to the receipt of compensation by the adviser.47 This statutory duty is not imposed on the managers of any other pooled vehicles. Section 36(b) creates a direct cause of action allowing the SEC and fund shareholders to bring suit against the adviser for breach of this duty.48 The explicit fiduciary duty in Section 36 empowers the SEC and fund shareholders to curb excessive fee levels, a powerful tool not available to investors in any other financial product.
In carrying out their responsibilities under Section 15, and in accordance with standards developed under Section 36(b), mutual fund directors take into account a variety of factors in their review of advisory contracts and, in particular, the level of the advisory fee. These include the services provided by the fund's adviser; costs to the adviser; the extent to which the adviser realizes economies of scale; and any "fall out" benefits realized by the adviser, such as brokerage commissions. Courts have also considered, in the context of litigation under Section 36(b), the directors' expertise, their conscientiousness in performing their duties and the adequacy of the information made available to them, among other factors.
In short, mutual fund regulation is unique in requiring that the most significant fee incurred in connection with investing in a fund be subject to independent, annual review in accordance with standards set forth in federal law and interpreted by federal courts.
b. Distribution Expenses. Like the investment advisory contract, the fund's contract with its principal underwriter must be approved annually by a majority of the fund's directors, and a majority of its independent directors. In addition, any payments by a fund for distribution-related expenses (including payments to investment professionals and advertising and marketing expenses) must, pursuant to Investment Company Act Rule 12b-1, be in accordance with a written plan that must be approved annually by the fund's board of directors, including a majority of the independent directors. The fund's directors must review, at least quarterly, the amounts spent under a 12b-1 plan and the reasons for these expenditures.
3. Fees Can Be Increased Only If Investors Vote To Raise Them.
Although mutual funds' boards are charged with reviewing the advisory and distribution contracts, their power is not exclusive. The advisory contract may not be materially amended without the approval of a majority of the fund's outstanding shares; thus, an adviser cannot unilaterally raise its fees, nor may the fund board alone approve a fee increase. Similarly, 12b-1 fees may not be increased without the approval of a majority of the funds' shareholders.
D. Mutual Fund Disclosure and Regulation Is Unmatched By Other Investment Products.
The unique nature of mutual fund fee disclosure and regulation is apparent when contrasted to the regulatory structure and disclosure regarding the fees charged for other financial products that are sold to individual investors. While these products are from distinctive regulatory and market environments, one theme is common to all of them: none is subject to the fee disclosure and approval processes comparable to that mandated for mutual funds.
A good illustration of the disparity between mutual funds and other financial products occurs in the defined contribution plan area. These retirement plans are governed by the Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Code. Plan sponsors are not generally required under ERISA to provide plan participants with disclosure describing the fees that may be imposed by various investment options, except when the plan sponsor is relying on the 404(c) safe harbor.49 In this instance, participants receive complete information about a mutual fund's fees because they must receive the mutual fund's full prospectus.
Mutual funds, however, constitute only about one-third of all defined contribution plan assets and approximately 42% of 401(k) plan assets. Other assets include bank and insurance company products and employer stock. Plan fiduciaries are required to deliver information about operating expenses of these investment vehicles only upon request by a participant. Because many participants are not aware they should ask for this information, many likely never receive it. The Department of Labor recently held hearings on 401(k) fees. A Department of Labor study released after the hearing noted that "it is clear from evidence in the literature that not all investment products disclose the fees and expenses charged to a 401(k) plan, nor are all of the fees and expenses charged by service providers disclosed."50 The Institute testified at the hearing and urged the adoption of regulations requiring that all participants in all 401(k) plans receive full fee information regarding all investment options.51
VI. Conclusion
The Institute appreciates the opportunity to testify before this Subcommittee. Mutual funds serve as a popular and cost-effective investment option for millions of middle-income Americans. The fees that mutual funds charge are one of several critical factors that investors should consider as part of an informed decision making process. While fees are important, several other considerations are too, including the fund's risks, its investment objectives and strategies for achieving them, and the services provided by the fund.
Mutual fund investors can readily obtain the information they need about fees. They can obtain this information directly from the standardized fee table that is required to appear in the front of every fund prospectus. And they can obtain the information through an exhaustive variety of fund company and independent sources.
The mutual fund industry is ever mindful of Justice Brandeis' admonition that, "To be effective, knowledge of the facts must be actually brought home to the investor." Thus, we want to make sure that investors not only receive comprehensible information about mutual fund fees, but that they actually use it.
We believe these are enduring responsibilities about which we can never be complacent. The mutual fund industry consistently has supported the SEC's efforts to improve fee disclosure, has called for disclosure in the 401(k) market, and taken the lead on many investor education efforts. We continue to explore ways to improve investor understanding about fees and stand ready to work with all to accomplish that goal.
APPENDIX I: "The Organization and Operation of a Mutual Fund"
APPENDIX II: ICI Investor Awareness Series: "Frequently Asked Questions About Mutual Fund Fees"
1William J. Baumol, Steven M. Goldfeld, Julia Gordon, and Michael F. Koehn. The Economics of Mutual Fund Markets: Competition Versus Regulation. Boston, MA: Kluwer Academic Publishing 1990, p.5; Erik R. Sirri and Peter Tufano, "Competition and Change in the Mutual Fund Industry," in Financial Services: Perspectives and Challenges, edited by Samuel L. Hayes, III, Cambridge, MA, HBS Press, 1990, pp. 199-203.
2Estimates are based on companies reporting data to the Institute, as well as Institute membership data.
3Each new fund need only have $100,000 before distributing its shares to the public. This is a relatively small start-up cost, and is often provided by the adviser as an initial investment.
4Electronic Commerce: Investing On-Line, Hearing before the Subcommittee on Finance and Hazardous Materials of the House Committee on Commerce, 105th Congress, 2ndSession (June 18, 1998).
51998 Mutual Fund Fact Book, Investment Company Institute, p. 64.
6"Mutual Fund Developments in 1997," Perspective, Vol. 4, No. 1 (March 1998), pp. 11-12. See also, "Sustaining the Industry's Culture: Managing Expectations," Strategic Insight Overview, June 1998, p. iii ("[T]he dynamism of [the fund] industrys smaller companies, combined with a relentless bull market, has meant that the industrys top 20 managers at the beginning of each year in the past decade lost market share in aggregate") (emphasis omitted).
7This measuring technique is known as the Herfendahl Index. "Mutual Fund Developments in 1997," Perspective, at p. 11.
8Estimate is based on data from companies that report to the Institute, including member and non-member companies. This number of funds corresponds to an estimated 6,227 fund classes.
9The estimates of simple average and weighted average expense ratios are based on data obtained from Morningstar Principia for Mutual Funds software. Data are for the 4,786 equity funds (including fund classes) that reported both total assets and expense ratios, including 30 funds with zero assets, and were included in the June 30, 1998 release by Morningstar, Inc. This data is smaller than the universe of funds and fund classes reporting to the Institute, which is an estimated 6,227 fund classes. Estimates of the number of shareholder accounts for these funds and fund classes were based on data reported to the Investment Company Institute.
10Investment Company Institute, The Profile Prospectus: An Assessment by Mutual Fund Shareholders:Volume I, Washington, D.C., May 1996, p. 22.
11Erik R. Sirri and Peter Tufano, "Costly Search and Mutual Fund Flows," (working paper) (October 1997), p. 3.
12Putnam, Lovell & Thornton, The Investment Management Industry in the United States, July 11, 1997, p. 31.
13A more comprehensive description of the costs of investing in mutual funds is included as Appendix II.
14NASD Rule of Conduct 2830(d)(1)(A).
15See, e.g., James K. Glassman, "Funds Lofty Fees Add Insult to Injury," The Washington Post, September 13, 1998, at H1 (noting that information about fund fees "are reported by Morningstar and Value Line and in every mutual fund prospectus. Or just call your current or prospective fund and ask.")
16Letter from Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, to Rep Edward J. Markey, dated May 9, 1997.
17Lipper Analytical Services, Inc., "The Third White Paper: Are Mutual Fund Fees Reasonable?" September 1997, at p. 11; see also H. Sloane and S. Savage, "Some Perspective Amid the Debate Over Expenses," Financial Planning, p. 82 (Sept. 1992).
18Putnam, Lovell & Thornton, The Investment Management Industry in the United States, p. 31.
19Based upon data reported to the Institute. Mutual funds that invest in foreign stocks (and other securities) clearly require more intensive investment research, and can present much more complex legal and administrative issues than are present in a typical domestic stock fund. These and other issues are what can give rise to higher expense ratios relative to domestic mutual funds.
20Letter from Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, to Rep. Edward J. Markey, dated May 9, 1997.
21Letter from Richard C. Breeden, Chairman, U.S. Securities and Exchange Commission, to Rep. John D. Dingell, dated April 15, 1992.
22Erik R. Sirri and Peter Tufano, "Competition and Change in the Mutual Fund Industry," in Financial Services: Perspectives and Challenges, edited by Samuel L. Hayes, III, Cambridge, MA, HBS Press, 1993, pp. 199-202.
23See Steve S. Savage, "Perspective Amid the Debate Over Mutual Fund Expenses," AIA Investor News, published by the American Investors Alliance, February 1993, p. 5.
24Lipper Analytical Services, Inc., "The Third White Paper" at p. 12.
25"Advisory Fee Contracts," Strategic Insight Overview, May 1998, p. ii.
26Lipper Analytical Services, Inc., "The Third White Paper" at p. 5. Interestingly, the relatively high fees charged by hedge funds permit them to highly compensate their portfolio managers and other professionals sometimes with multi-million dollar contracts -- which in turn puts upward cost pressure on mutual funds. Many mutual funds compete with hedge funds to attract and retain talented investment managers.
27Investment Company Institute calculation based on data provided to the Institute by the Commodities Futures Trading Commission in response to a Freedom of Information Request dated December 6, 1996 (FOIA 96-0411).
28Lipper Analytical Services, Inc., "The Third White Paper" at p.5.
29Lipper reported that Canadian fund expense ratios averaged 2.4%, as compared to 1.2% for U.S. funds. Lipper Analytical Services, Inc., "The Third White Paper" at p. 5. Canadian Business magazine reported a somewhat smaller difference for long-term funds. It found that the average Canadian long-term fund had an expense ratio of 2.1%, as compared to 1.3% for U.S. funds. J. Harris, "Big Fees, Small Results," Canadian Business (Sept. 1997), p. 42.
30"Trends in the Offshore Mutual Fund Market," The Cerulli-Lipper Analytical Report, Cerulli Associates, Inc. and Lipper Analytical Services, Inc., 1996, p. 29.
31Lipper Analytical Services, Inc., "The Third White Paper" at p. 5.
32Financial Research Corporation, "Industry-Wide Expense Trends: Should Industry Asset Growth Necessarily Translate Into Lower Average Expense Ratios?" January 5, 1998.
33See "Advisory Fee Contracts: Recent Trends and Issues," Strategic Insight Overview, May 1998, pp. ii-v (using asset weighted averages, total expense ratios decline as assets grow). Similarly, the Lipper report states that management fees are declining for older, more successful funds, and notes that "[o]ne reason for this may be that these older funds have grown significantly in size." Lipper Analytical Services, Inc., "The Third White Paper" at p. 13.
34Various empirical studies have found that mutual funds exhibit economies of scale. See generally, William J. Baumol, Steven M. Goldfield, Lilli A. Gordon, and Michael F. Koehn, The Economies of Mutual Fund Markets: Competition versus Regulation, Boston: Kluwer Academic Publisher, 1990, pp. 192-94; Sean Collins and Phillip Mack, "The Optimal Amount of Assets Under Management in the Mutual Fund Industry," Financial Analysts Journal, 53:5 (October 1997), pp. 70-71.
35Lipper Analytical Services, Inc., "The Third White Paper" at p. 12.
36Investment Company Act Release No. 23064 (March 13, 1998). One of the most significant changes to the prospectus is the requirement to include in the risk/return summary a bar chart graphically illustrating the volatility of the funds total returns over the past ten years, a table comparing the funds return figures to those of an appropriate broad-based securities market index and the funds best and worst quarter performance over the last ten years. These requirements are designed to improve fund risk disclosure.
37Other changes include: (1) adding a new line item in the shareholder transaction section of the table describing account fees charged by the fund; (2) modifying the caption for sales charges (loads); and (3) adding a clear narrative explanation of the purpose of the hypothetical example.
38Investment Company Act Release No. 23065 (March 13, 1998). Mutual funds may file profiles with the SEC beginning on June 1, 1998 and may use the profile 30 days after it is filed.
39Specifically, profiles will summarize information about a funds investment objectives, strategies, risks, performance, fees, investment adviser and portfolio manager, purchase and redemption procedures, distribution and services available to fund investors.
40Both amended Form N-1A and the profile rule specifically permit funds to tailor their prospectus (or profile) for use in the defined contribution retirement plan market (e.g., by modifying purchase, redemption and taxation information).
41In addition to the prospectus, funds must send shareholders reports at least semi-annually that contain the funds financial statements, consisting of a balance sheet, an income statement, a portfolio schedule, a statement of operations and condensed financial information. The condensed financial information includes the funds expense ratios over time.
42Securities Act Release No. 7497 (January 28, 1998).
43SEC to Take 'Wait-and-See' Approach to Mutual Fund Fees, Dow Jones News Service, July 1, 1998.
44Morningstar Mutual Funds, How-to-Use Guide, p. 35; see alsoMarshall E. Blume, "An Anatomy of Morningstar Ratings," Financial Analysts Journal, Vol. 54, No. 2, March/April 1998.
45The Profile Prospectus: An Assessment by Mutual Fund Shareholders, Investment Company Institute, 1996, p. 23; see also "Financial Advisers Have Pull," Registered Representative, Sept. 30, 1998 survey of 2,000 mutual fund owners found that 41% said advisers were the most valuable source of information, compared with the funds prospectus (17%), press articles (12%), friends and relatives (7%), on-line services (4%) and fund advertisements (1%)). Nevertheless, it is likely that the SECs required disclosures are the source of much of the fee information available through these channels. Indeed, one reason why information about mutual funds is so readily available is that they are disclosed in so transparent a manner in fund prospectuses.
The NASD recognized the importance of investment professionals as a source of information when it reminded its members of their obligation, in connection with the required suitability determination, to disclose to their customers material facts, including a funds expense ratio and sales charges. "NASD Further Explains Member Obligations and Responsibilities regarding Mutual Fund Sales Practices," Special NASD Notice to Members 95-80. According to the NASD Notice, although the prospectus discloses many of the details of various fee structures, investment professionals must provide sufficient information to investors so that they are able to understand and evaluate the structure of multi-class and master feeder funds. In addition, to the extent that investment professionals declare expense ratios as material to an investor purchasing fund shares, these expense ratios need to be explained and compared with those of other mutual funds.
46"Mutual Fund IQ Test," http:~money.com>, at Q.14. "If two mutual funds hold the same securities, but one has higher operating expenses than the other, which of the following statements is true? The fund with the higher expenses will have a higher return. (Incorrect; chosen by 1.13% of on-line respondents). The fund with the lower expenses will have a higher return. (Correct; chosen by 80.63%). You cant say which fund would have a higher return, because expenses have no effect (Incorrect: chosen by 18.24%)."
47A mutual fund also enters into a number of contracts with other service providers, such as the funds principal underwriter, administrator, custodian and transfer agent. As part of its overall responsibilities, the board of directors oversees the performance of these service providers. If the service provider is the investment adviser or an affiliate of the adviser, the fund board must approve the contract with the service provider at the time the contract is entered into to ensure that any compensation paid thereunder meets the standards of Section 36(b).
48See, e.g.,Kalish v. Franklin Advisers, Inc., 928 F.2d 590 (2d Cir. 1991); Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir. 1982).
49Many plan sponsors choose to rely on the safe harbor established under Section 404(c) of ERISA, which relieves the sponsor from liability for a employees investment decisions. In order to be in compliance with the safe harbor, employees must be provided with, among other things, (1) a description of the available investment alternatives; (2) a description of any transaction fees and expenses (but not any plan administration fees) that affect the participants account balance in connection with purchases or sales (e.g., commissions, sales loads, deferred sales charges, redemption or exchange fees); and (3) in the case of an investment alternative subject to the Securities Act, a copy of the most recent prospectus.
'50Study of 401(k) Plan Fees and Expenses, Pension and Welfare Benefits Administration, April 13, 1998, at Section 3.7.
51Statement of Matthew P. Fink, President, Investment Company Institute, on 401(k) Plan Expenses, before the Pension and Welfare Benefits Administration, Department of Labor (Nov. 12, 1997).
Copyright © 2017 by the Investment Company Institute


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Oral food challenges for diagnosis and management of food allergies
- Author
- Scott H Sicherer, MD, FAAAAI
Scott H Sicherer, MD, FAAAAI
- Section Editor — Food Allergy
- Professor of Pediatrics
- Icahn School of Medicine at Mount Sinai
- Section Editor
- Robert A Wood, MD
Robert A Wood, MD
- Editor-in-Chief — Allergy and Immunology
- Section Editor — Pediatric Allergy
- Professor of Pediatrics
- Johns Hopkins University School of Medicine
- Deputy Editor
- Elizabeth TePas, MD, MS
Elizabeth TePas, MD, MS
- Senior Deputy Editor — UpToDate
- Deputy Editor — Allergy and Immunology
- Deputy Editor — Pediatrics
- Instructor in Medicine
- Harvard Medical School
The diagnosis of a food allergy requires consideration of the details of an individual's history, knowledge about the epidemiology of different food allergies, and specific test results. When these elements do not clearly confirm or refute an allergy, the clinician, typically an allergy specialist or sometimes a gastroenterologist, may perform a clinician-supervised oral food challenge (OFC) [1-8]. OFCs may also be used to determine if a food allergy has resolved. In addition, they can be undertaken to define other adverse reactions to foods, such as intolerance.
OFCs generally consist of a gradual feeding of the test food under close observation. The test usually results in a definitive conclusion about whether the food was tolerated.
An OFC is preceded by a period of dietary elimination, performed either therapeutically (because the food was already suspected or known to have caused a reaction) or for diagnostic reasons (to determine if elimination of the suspect food resulted in amelioration of symptoms).
This topic review will present the role of diagnostic elimination diets, the selection of patients for OFCs, different types of OFCs, and a general approach to performing an OFC. Other related food allergy topics are covered separately. (See "Diagnostic evaluation of food allergy" and "Management of food allergy: Avoidance" and "History and physical examination in the patient with possible food allergy" and "Food allergy in children: Prevalence, natural history, and monitoring for resolution".)
Elimination diets are performed prior to an oral food challenge (OFC). Elimination diets are used diagnostically to determine if symptoms, usually chronic in nature, resolve after the suspected food(s) is removed from the diet. Elimination diets are discussed in greater detail in another topic review, and avoidance of a food allergen once the allergy is diagnosed is presented separately. (See "Diagnostic evaluation of food allergy" and "Management of food allergy: Avoidance".)
Subscribers log in hereTo continue reading this article, you must log in with your personal, hospital, or group practice subscription. For more information or to purchase a personal subscription, click below on the option that best describes you:Literature review current through: Jun 2017. | This topic last updated: Oct 15, 2015.The content on the UpToDate website is not intended nor recommended as a substitute for medical advice, diagnosis, or treatment. Always seek the advice of your own physician or other qualified health care professional regarding any medical questions or conditions. The use of this website is governed by the UpToDate Terms of Use ©2017 UpToDate, Inc.References
- Bock SA, Sampson HA, Atkins FM, et al. Double-blind, placebo-controlled food challenge (DBPCFC) as an office procedure: a manual. J Allergy Clin Immunol 1988; 82:986.
- American College of Allergy, Asthma, & Immunology. Food allergy: a practice parameter. Ann Allergy Asthma Immunol 2006; 96:S1.
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- NIAID-Sponsored Expert Panel, Boyce JA, Assa'ad A, et al. Guidelines for the diagnosis and management of food allergy in the United States: report of the NIAID-sponsored expert panel. J Allergy Clin Immunol 2010; 126:S1.
- Fiocchi A, Schünemann HJ, Brozek J, et al. Diagnosis and Rationale for Action Against Cow's Milk Allergy (DRACMA): a summary report. J Allergy Clin Immunol 2010; 126:1119.
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- Eigenmann PA, Sicherer SH, Borkowski TA, et al. Prevalence of IgE-mediated food allergy among children with atopic dermatitis. Pediatrics 1998; 101:E8.
- Sicherer SH, Sampson HA. Food hypersensitivity and atopic dermatitis: pathophysiology, epidemiology, diagnosis, and management. J Allergy Clin Immunol 1999; 104:S114.
- Liacouras CA, Spergel JM, Ruchelli E, et al. Eosinophilic esophagitis: a 10-year experience in 381 children. Clin Gastroenterol Hepatol 2005; 3:1198.
- Fleischer DM, Bock SA, Spears GC, et al. Oral food challenges in children with a diagnosis of food allergy. J Pediatr 2011; 158:578.
- Hourihane JO, Grimshaw KE, Lewis SA, et al. Does severity of low-dose, double-blind, placebo-controlled food challenges reflect severity of allergic reactions to peanut in the community? Clin Exp Allergy 2005; 35:1227.
- Busse PJ, Nowak-Wegrzyn AH, Noone SA, et al. Recurrent peanut allergy. N Engl J Med 2002; 347:1535.
- Fleischer DM, Conover-Walker MK, Christie L, et al. Peanut allergy: recurrence and its management. J Allergy Clin Immunol 2004; 114:1195.
- Wainstein BK, Studdert J, Ziegler M, Ziegler JB. Prediction of anaphylaxis during peanut food challenge: usefulness of the peanut skin prick test (SPT) and specific IgE level. Pediatr Allergy Immunol 2010; 21:603.
- Neuman-Sunshine DL, Eckman JA, Keet CA, et al. The natural history of persistent peanut allergy. Ann Allergy Asthma Immunol 2012; 108:326.
- Benhamou AH, Zamora SA, Eigenmann PA. Correlation between specific immunoglobulin E levels and the severity of reactions in egg allergic patients. Pediatr Allergy Immunol 2008; 19:173.
- Blumchen K, Beder A, Beschorner J, et al. Modified oral food challenge used with sensitization biomarkers provides more real-life clinical thresholds for peanut allergy. J Allergy Clin Immunol 2014; 134:390.
- Rolinck-Werninghaus C, Niggemann B, Grabenhenrich L, et al. Outcome of oral food challenges in children in relation to symptom-eliciting allergen dose and allergen-specific IgE. Allergy 2012; 67:951.
- van der Zee T, Dubois A, Kerkhof M, et al. The eliciting dose of peanut in double-blind, placebo-controlled food challenges decreases with increasing age and specific IgE level in children and young adults. J Allergy Clin Immunol 2011; 128:1031.
- Summers CW, Pumphrey RS, Woods CN, et al. Factors predicting anaphylaxis to peanuts and tree nuts in patients referred to a specialist center. J Allergy Clin Immunol 2008; 121:632.
- Ta V, Weldon B, Yu G, et al. Use of Specific IgE and Skin Prick Test to Determine Clinical Reaction Severity. Br J Med Med Res 2011; 1:410.
- Clark AT, Ewan PW. Interpretation of tests for nut allergy in one thousand patients, in relation to allergy or tolerance. Clin Exp Allergy 2003; 33:1041.
- Knight AK, Shreffler WG, Sampson HA, et al. Skin prick test to egg white provides additional diagnostic utility to serum egg white-specific IgE antibody concentration in children. J Allergy Clin Immunol 2006; 117:842.
- David TJ. Anaphylactic shock during elimination diets for severe atopic eczema. Arch Dis Child 1984; 59:983.
- Flinterman AE, Knulst AC, Meijer Y, et al. Acute allergic reactions in children with AEDS after prolonged cow's milk elimination diets. Allergy 2006; 61:370.
- Perry TT, Matsui EC, Conover-Walker MK, Wood RA. Risk of oral food challenges. J Allergy Clin Immunol 2004; 114:1164.
- Perry TT, Matsui EC, Kay Conover-Walker M, Wood RA. The relationship of allergen-specific IgE levels and oral food challenge outcome. J Allergy Clin Immunol 2004; 114:144.
- Celik-Bilgili S, Mehl A, Verstege A, et al. The predictive value of specific immunoglobulin E levels in serum for the outcome of oral food challenges. Clin Exp Allergy 2005; 35:268.
- Skolnick HS, Conover-Walker MK, Koerner CB, et al. The natural history of peanut allergy. J Allergy Clin Immunol 2001; 107:367.
- Aldámiz-Echevarría L, Bilbao A, Andrade F, et al. Fatty acid deficiency profile in children with food allergy managed with elimination diets. Acta Paediatr 2008; 97:1572.
- Zijlstra WT, Flinterman AE, Soeters L, et al. Parental anxiety before and after food challenges in children with suspected peanut and hazelnut allergy. Pediatr Allergy Immunol 2010; 21:e439.
- Knibb RC, Ibrahim NF, Stiefel G, et al. The psychological impact of diagnostic food challenges to confirm the resolution of peanut or tree nut allergy. Clin Exp Allergy 2012; 42:451.
- Franxman TJ, Howe L, Teich E, Greenhawt MJ. Oral food challenge and food allergy quality of life in caregivers of children with food allergy. J Allergy Clin Immunol Pract 2015; 3:50.
- Sicherer SH. Food allergy: when and how to perform oral food challenges. Pediatr Allergy Immunol 1999; 10:226.
- Niggemann B, Rolinck-Werninghaus C, Mehl A, et al. Controlled oral food challenges in children--when indicated, when superfluous? Allergy 2005; 60:865.
- Bindslev-Jensen C. Standardization of double-blind, placebo-controlled food challenges. Allergy 2001; 56 Suppl 67:75.
- Sampson HA, Gerth van Wijk R, Bindslev-Jensen C, et al. Standardizing double-blind, placebo-controlled oral food challenges: American Academy of Allergy, Asthma & Immunology-European Academy of Allergy and Clinical Immunology PRACTALL consensus report. J Allergy Clin Immunol 2012; 130:1260.
- Caffarelli C, Petroccione T. False-negative food challenges in children with suspected food allergy. Lancet 2001; 358:1871.
- Sampson HA. Use of food-challenge tests in children. Lancet 2001; 358:1832.
- Ahrens B, Niggemann B, Wahn U, Beyer K. Positive reactions to placebo in children undergoing double-blind, placebo-controlled food challenge. Clin Exp Allergy 2014; 44:572.
- Niggemann B, Lange L, Finger A, et al. Accurate oral food challenge requires a cumulative dose on a subsequent day. J Allergy Clin Immunol 2012; 130:261.
- Miceli Sopo S, Monaco S, Greco M, Onesimo R. Prevalence of adverse reactions following a passed oral food challenge and factors affecting successful re-introduction of foods. A retrospective study of a cohort of 199 children. Allergol Immunopathol (Madr) 2016; 44:54.
- Briggs D, Aspinall L, Dickens A, Bindslev-Jensen C. Statistical model for assessing the proportion of subjects with subjective sensitisations in adverse reactions to foods. Allergy 2001; 56 Suppl 67:83.
- Chinchilli VM, Fisher L, Craig TJ. Statistical issues in clinical trials that involve the double-blind, placebo-controlled food challenge. J Allergy Clin Immunol 2005; 115:592.
- Niggemann B, Wahn U, Sampson HA. Proposals for standardization of oral food challenge tests in infants and children. Pediatr Allergy Immunol 1994; 5:11.
- Personnel and equipment to treat systemic reactions caused by immunotherapy with allergenic extracts. American Academy of Allergy and Immunology. J Allergy Clin Immunol 1986; 77:271.
- Reibel S, Röhr C, Ziegert M, et al. What safety measures need to be taken in oral food challenges in children? Allergy 2000; 55:940.
- Sicherer SH. Food protein-induced enterocolitis syndrome: case presentations and management lessons. J Allergy Clin Immunol 2005; 115:149.
- Mankad VS, Williams LW, Lee LA, et al. Safety of open food challenges in the office setting. Ann Allergy Asthma Immunol 2008; 100:469.
- Sicherer SH, Simons FE. Quandaries in prescribing an emergency action plan and self-injectable epinephrine for first-aid management of anaphylaxis in the community. J Allergy Clin Immunol 2005; 115:575.
- Vlieg-Boerstra BJ, Bijleveld CM, van der Heide S, et al. Development and validation of challenge materials for double-blind, placebo-controlled food challenges in children. J Allergy Clin Immunol 2004; 113:341.
- van Odijk J, Ahlstedt S, Bengtsson U, et al. Double-blind placebo-controlled challenges for peanut allergy the efficiency of blinding procedures and the allergenic activity of peanut availability in the recipes. Allergy 2005; 60:602.
- Grimshaw KE, King RM, Nordlee JA, et al. Presentation of allergen in different food preparations affects the nature of the allergic reaction--a case series. Clin Exp Allergy 2003; 33:1581.
- Chatterjee U, Mondal G, Chakraborti P, et al. Changes in the allergenicity during different preparations of Pomfret, Hilsa, Bhetki and mackerel fish as illustrated by enzyme-linked immunosorbent assay and immunoblotting. Int Arch Allergy Immunol 2006; 141:1.
- Bernhisel-Broadbent J, Strause D, Sampson HA. Fish hypersensitivity. II: Clinical relevance of altered fish allergenicity caused by various preparation methods. J Allergy Clin Immunol 1992; 90:622.
- Sicherer SH, Morrow EH, Sampson HA. Dose-response in double-blind, placebo-controlled oral food challenges in children with atopic dermatitis. J Allergy Clin Immunol 2000; 105:582.
- Hourihane JO'B, Kilburn SA, Nordlee JA, et al. An evaluation of the sensitivity of subjects with peanut allergy to very low doses of peanut protein: a randomized, double-blind, placebo-controlled food challenge study. J Allergy Clin Immunol 1997; 100:596.
- Taylor SL, Hefle SL, Bindslev-Jensen C, et al. A consensus protocol for the determination of the threshold doses for allergenic foods: how much is too much? Clin Exp Allergy 2004; 34:689.
- Taylor SL, Hefle SL, Bindslev-Jensen C, et al. Factors affecting the determination of threshold doses for allergenic foods: how much is too much? J Allergy Clin Immunol 2002; 109:24.
- Bindslev-Jensen C, Ballmer-Weber BK, Bengtsson U, et al. Standardization of food challenges in patients with immediate reactions to foods--position paper from the European Academy of Allergology and Clinical Immunology. Allergy 2004; 59:690.
- Rance F, Dutau G. Labial food challenge in children with food allergy. Pediatr Allergy Immunol 1997; 8:41.
- Kok EE, Meijer Y, Kentie PA, et al. Oropharyngeal symptoms predict objective symptoms in double-blind, placebo-controlled food challenges to cow's milk. Allergy 2009; 64:1226.
- Flinterman AE, Hoekstra MO, Meijer Y, et al. Clinical reactivity to hazelnut in children: association with sensitization to birch pollen or nuts? J Allergy Clin Immunol 2006; 118:1186.
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- Flinterman AE, Pasmans SG, Hoekstra MO, et al. Determination of no-observed-adverse-effect levels and eliciting doses in a representative group of peanut-sensitized children. J Allergy Clin Immunol 2006; 117:448.
- Acute IgE-mediated reactions
- Chronic illness
- Initial diagnosis
- Assessing resolution
- Open OFC
- Single-blind OFC
- Double-blind, placebo-controlled OFC
- Patient preparation
- Location
- Safety
- Food preparation
- Dosing and timing
- - Total dose
- - Starting dose
- - Dose escalation
- Monitoring
- Discontinuing a challenge
- Medical treatment for a reaction
- Observation following challenge
- Post-challenge counseling


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text:
Contact Us
Planning Your Visit
Visiting GWSR
2017 Calendar and Timetables
2017 Events Calendar
2017 Ticket Prices
Buy Tickets On-line
Somewhere To Stay
A Look at the GWR
Drone Flight Over Railway
Finding Us
Hayles Abbey Halt
Cheltenham Race Course
Public Transport
Map of the Line
What To See And Do
A Great Day Out For Everyone
Children's Events And Activities
Locomotive Roster
Winchcombe Discovery Coach
Winchcombe Model Railway
Toddington Memorabilia Displays
Toddington Demonstration Signalbox
Toddington Yard Viewing Area
Toddington Narrow Gauge Railway
Driver Experience Days
Cheltenham Race Days
Diesel Locomotives
Steam Locomotives
Rolling Stock
Our Facilities
The Flag and Whistle Café
Winchcombe Coffee Pot Café
On-train Catering
GWR Shops
On-line Shop
Washroom and Toilet Facilities
Car Parking
Diesel Gala 28-30 July
Getting There
Sales Stands
Tickets Please!
Locomotives and Coaches
What's Happening Where?
Blogs, Links and Feedback
Social Media
Blogs and Photo diaries
GWR Twitter
GWR Facebook
Press Office
Broadway: Last mile share offer closes £80,000 ahead of budget
GWR Volunteers Celebrate Best Year Ever
Donnington Brewery takes to the rails with the GWSR
Hayles Abbey Halt opens
GWSR Links
Affiliated Sites
Link Exchange
Customer Feedback
Group & School Visits
School & Playgroup Visits
WW II Evacuation Experience
Foundation and KS1
Playgroups and Reception Classes
School Reports
Group Visits to the GWR
Group Bookings
Holiday & Coach Companies
Hire Your Own Train
Supporting The Railway
Membership & Volunteering
Donations and Legacies
Legacy to the Railway
Shares in the GWSR
Broadway - The Last Mile
Buying Shares
Management and Documentation
Ownership of the Railway
The Management Team
Terms and Conditions
Policy Documents
Driver Experience Days
Diesel Driver Experience
Steam Footplate Experience
Firing and Driving - what it's like
Stock Lists
Steam Locomotives
Diesel Locomotives
Diesel Multiple Units
Rolling Stock
Speaking Engagement Service
2017 Lineside Passes
Interactive Footplate
Jargon Buster
A view from the bridge
A tale of two halls
Hawksworth tenders
Merchant Navy pacifics
Boiler washouts
Class 47/7s
Class 73
The BR Sulzer Type 2s
Grange Locos
The USATC S160 class 2-8-0s
Return of the Coffeepot
Railway Timeline
Underneath the arches
The end and the beginning
The start of through services
Then and now - B4632 bridge near Stanway
Then and now - Toddington Station
Then and now - Toddington Car Park
Then and now - Chicken Curve
Then and now - Stanway Viaduct
Then and now - Looking towards Hunting Butts
Then and now - Southam Lane bridge
Contact Form
Join our Mailing List
Media Enquiries
A look at the GWR
Find out more about the Gloucestershire Warwickshire Railway by watching this short video.


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