Morningstar Advisor - Spring 2008 - 21

Junk-Bond, Treasury Spreads Widen U.S. LT Gvt Yld (%Yield) LB Hi-Yld (%Yield) U.S. IT Gvt Yld (%Yield) 12 8 about the same as in 2006, says Russel Kinnel, Morningstar’s director of fund research. It’s bad news for shareholders if this is the beginning of the end of declining expenses, Kinnel says. Morningstar research has found that costs are the best predictors of future returns. From 2003 through 2006, Kinnel says, the average asset-weighted expense ratio fell to 0.9% from 1%. In 2007, however, the average expense ratio stayed at 0.9%, and the costs in the balanced and municipal-bond asset classes rose. Domestic-equity and taxable-bond funds dipped 1 basis point; international enjoyed a meaningful drop of 4 basis points. The biggest reason asset-weighted expense ratios dropped from 2003 to 2006, Kinnel says, wasn’t that fund companies cut fees (although some did). It was that advisors and investors sought out low-cost funds because they had better performance records than higher-costs funds in the wake of the 2000-02 bear market. 4 Another factor was the mutual fund scandal, Kinnel says. It spurred some companies voluntarily to lower or stop boosting their fees, while others were forced to lower fees by Eliot Spitzer as terms for settlement. (The Spitzermandated cuts are set to expire over the next two years, after which companies will be free to raise fees that had been forced down.) In 2007, it’s clear that costs didn’t matter that much to advisors and investors, Kinnel says. The biggest spike in fees came in the balanced group, and it was driven by the explosive growth of Franklin Templeton Founding Funds Allocation FFALX. “The fund has netted nearly $15 billion in five years,” Kinnel says, “because it charges a higher 12b-1 fee than the underlying funds it invests in. That makes it more attractive to advisors who keep the 12b-1 fee.” In other words, it would be cheaper for investors to buy the three underlying funds separately than to have them rolled up into one fund. K Jan 07 Mar 07 May 07 July 07 Sep 07 Nov 07 Jan 08 Mar 08 average fund’s return down a percentage point or two, and if yield spreads widen a bit more, high-yield investors might be left with a return in the 4% to 5% range over the next 12 months. After Years of Decline, Fund Fees Level Off U.S. LT Gvt Yld (%Yield) LB Hi-Yld (%Yield) U.S. IT Gvt Yld (%Yield) Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 After declining for years, the expense ratio that the average fund investor paid in 2007 was LIFE COMES AT YOU FAST ® When it does, know that we’re on the other end with Simpler Solutions. Like using variable annuities and living beneﬁts to provide more income potential with less income risk during retirement. We think it’s a solid solution. See how a recent study by Ibbotson Associates supports this conclusion. For more information, call 877-966-3669 and enter promo code 56204 or visit nationwide.com/moreincome Not a deposit, not FDIC or NCUSIF insured, not guaranteed by the institution, not insured by any federal government agency, may lose value. The general distributor for variable annuities is Nationwide Investment Services Corporation, member FINRA. Nationwide, Nationwide Financial, the Nationwide framemark, On Your Side and Life Comes at You Fast are federally registered service marks of Nationwide Mutual Insurance Company. © 2008 Nationwide Financial Services, Inc. All rights reserved. In MI only: Nationwide Investment Svcs. Corporation. Ibbotson Associates, Inc. is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. The Ibbotson name and logo are property of Ibbotson. Ibbotson and its afﬁ liates are not related to Nationwide ® and its afﬁ liates. For broker/dealer use only – not for use with the public. NFV-0468AO MorningstarAdvisor.com 21 T DOTTED LINE OR BELOW 3/27/08 5:58:43 PM
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Morningstar Advisor - Spring 2008

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