Thursday, January 25, 2007

Gong Show # 3 - High MERs on Mutual Funds

One of my pet peeves as a financial planner is high management fees or MER's (Management Expense Ratios) on mutual funds, especially mediocre mutual funds. This hurts my client's portfolios and takes away from achieving their goals. Canada has some of the highest fees on mutual funds in the developed world and for the most part they are unnecessarily high. Most investors do not understand that the management expense ratio directly takes away from their return and that if a fund has a high fee structure then there will always be a headwind on their potential returns.

A cursory analysis finds that out of the 3783 mutual funds in Canada, 424 have a MER of 3.0% or higher, and 1470 have a MER of 2.5% or higher. There is virtually no reason why a MER should be over 3% and a MER over 2.5% should be looked at with some critical eyes. Granted, some funds have a performance fee added in to the MER but this represents very few of these 424 funds over 3%. The major culprits for high fees are "Investors Group", "Stone & Co", and most of the novelty international sector funds of all the other major fund companies, including CI, Trimark, Fidelity, AGF, Dynamic, etc.. A management fee of over 3% is intolerable in my opinion and actually anything over 2% should be rationalized and value should be shown with long term out-performance. The trouble with most of these high fee culprits is long term UNDER-PERFORMANCE.

High Management Fees on Mutual Funds get the big gong from me for keeping Canadian investors poorer than necessary and for unfairly padding the pockets of investment advisors and mutual fund companies.

9 comments:

mohican said...

A real shining star in trying to reduce fees is Sionna investment managers run by Kim Shannon. She recently took over the Brandes Canadian Balanced Fund and immediately lowered the MER from 2.5% to a very respectable 1.9%. All of this from a management team with a great track record.

RBC, TD, and CI Investments have all made noteworthy efforts over the past couple of years to lower fees and I am looking forward to more decreases in MERs in the future.

Freako said...

Great topic, this has long been one of my pet peeves. As mentioned earlier, on index funds, the TD E-funds MER's are very low, almost down to U.S. levels.

Many years ago, I discovered with horrow the fees my father (who was overall fairly astute in all things finance) was paying on his Investors group funds. First a 6 percent front end load, and then criminal MER's. To add insult to injury, the funds underperformed compared to other funds over a long period of time.

He bought on a monthly fixed bases, and some goofball of a fund salesman had been collecting money for 10 YEARS, all from a single sale.

BTW, I played around some with the Sauder data and found some rent-price relationships that were fairly telling, though no surprise. Will pass them onto you via e-mail after some tweaks.

Uncertain Buyer said...

How can I find out my Funds MER? I am with BMO.

mohican said...

Uncertain: Try this link to morningstar.ca.

mohican said...

freako: unfortunately I have dealt with too many people just like your dad who have lost untold sums of money because of fees and their subsequent drag on returns.

BTW - I'd love to see what you've come up with on P/E ratios. That is what I am working on for tomorrows post. I have been trying to get some good data on rents and I am not have so much luck.

Uncertain Buyer said...
This comment has been removed by the author.
Uncertain Buyer said...

Good Link....Thanks.

Freako said...

I wanted to see the obvious for myself, namely that a high PE predicts future price drops.

The problem is a lack of readily available data. Sauder tracks rents, but only from a relative perspective (rate of change). So I did the next best thing, calculated the ratio of rent increases to price increases over the previous four years and compared to price change over the NEXT four years. Found a negative correlation of 0.56. If the relationship holds into future, RE is very likely to underperform over the next four years. The visual representation is very telling.

stk said...

As an experienced U.S. mutual fund investor, I was shocked to discover the high MERs on Canadian mutual funds. You may be interested in reading my perspective (which compares bottom line for a Canadian investor -vs- a U.S. investor).

Cheers,
stk