Management fees for many municipal bond mutual funds have jumped this year because of the drainage of fund assets at the end of last year.

According to a Morningstar report released yesterday, many mutual funds have breakpoints that trigger expense hikes or cuts based on assets under management.

If assets shrink past a certain point, a fund might automatically raise its expenses, said Russ Kinnel, director of mutual fund research at Morningstar.

That is exactly what has happened to many muni funds.

Muni funds lost 9.2% of their assets last year, according to AMG Data Services. Assets shrank to $341.93 billion at the end of the year from $376.61 billion on Jan. 2, 2008.

The cause was more than $50 billion in market losses, more than outpacing roughly $16 billion in inflows for the year.

Those changes triggered higher expense ratios at many muni funds.

According to Morningstar data, the asset-weighted expense ratio at municipal funds has jumped to 0.76% from 0.72% at the end of last year. That is the priciest expense ratio since 1996.

The 0.72% ratio reported at the end of last year, which was flat compared with 2007, was backward-looking. Ratios posted in annual reports reflect annual averages.

"The annual report number tells you what the average they charged over that year was, which is part of why the numbers seem lower than they really are," Kinnel said.

Vanguard last month disclosed higher fees for at least 29 mutual funds, not all of which hold muni assets. According to Morningstar data, the average Vanguard fund expense ratio has ticked up six basis points.

Five Vanguard muni funds - High-Yield Tax-Exempt (VWAHX), Intermediate-Term Tax-Exempt (VWITX), Long-Term Tax-Exempt (VWLTX), Short-Term Tax-Exempt (VWSTX), and Limited-Term Tax-Exempt (WMLTX) - began charging expense ratios of 0.2%, compared with 0.15% last year. That is their highest expense ratio in nearly a decade.

Vanguard is not the only fund company raising fees because of lower asset values. Mutual fund assets excluding money-market funds shriveled to $5.9 trillion at the end of February from $8 trillion at the beginning of 2008, Morningstar said.

Vanguard is just the only one drawing attention to it.

Higher expense ratios in 2009 would buck a nearly 30-year trend of lower fees at mutual funds.

According to the Investment Company Institute, mutual fund fees have been drifting downward since 1980 because investors are entrusting their money to funds with lower expense ratios.

This spawned competition among funds.

Kinnel said investors should shop for lower-cost funds. That way if fees rise, costs will still be comparatively low.

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