The impact of annual fees on the net returns of Icelandic mutual funds

This article analyzes the annual management fee of Icelandic mutual funds and its impact on returns from 2012 to 2023. It aims to evaluate how these fees have affected investor returns over time and what they reveal about the long-term cost of diversification for investors. It examines the proportion of nominal and real returns a typical investor paid in costs due to mutual fund management fees and how those fees evolved over the period. It scrutinizes the fees charged by bond funds concerning their annual compounded returns and expected nominal and real returns based on the required yields of non-indexed and indexed bonds at the beginning of each year. Although central to net investment performance, this type of analysis is usually overlooked by both investors and policymakers. The study also compares Icelandic mutual fund fees with United States (U.S.) trends over the same period. The percentage of management fees of annual compounded real returns was 61 percent for medium-term bond funds, 71 percent for long-term bond funds, 16 percent for domestic equity funds, and 22 percent for equity funds investing in foreign assets. While Duvall and Rybak (2023) show that U.S. management fees declined by approximately 40 percent during this period, Icelandic fees remained unchanged.