The fee crunch:
Not all investors get value for money
An exclusive Report on Business analysis of
many of Canada's most popular mutual funds shows
management expenses often obliterate most of a fund's returns.
By JANET McFARLAND AND ROB CARRICK
With files from reporter Keith Damsell
Globe and Mail: Thursday, June 24, 2004 -
TORONTO and OTTAWA -- What they don't tell you about fees
Many investors are surprised at how much they pay in fees to their mutual fund
companies - and who gets the money.
An ROB investigation shows that there is often no relationship between mutual
fund fees and performance and that many investors pay handsomely for poor
That's one reason why mutual funds have profited even as returns have stagnated
Canadians have invested billions of dollars in mutual funds that charge fees
that eat up much or all of their returns, an exclusive Report on Business (ROB)
The ROB review of many of Canada's most popular mutual funds shows that
management expenses -- the built-in fees that are automatically deducted from
the price of each mutual fund unit before the value is published -- can often
obliterate most of a fund's returns.
The review found that at least $32.7-billion is invested in funds in Canada that
lost money for investors over the five years to March 31, even though the fund
companies made tens of millions of dollars in revenue from the fees. Another
$21-billion-plus is invested in funds where more than half of the gross returns
of the fund went to pay fees, the ROB analysis shows.
The bottom line? The ROB review shows that, in too many cases, investors are not
getting good value for the fees they are paying.
"What's interesting to me is that in most products, the more you pay, the more
you get," says Brian Tang, president of Vancouver-based Fundamental Research
Corp., who did his own study last year on management expense ratios (MERs) of
Canadian equity funds. "With these funds, it appears that is not the case."
The Globe's review looked at 615 mutual funds in the major equity, bond and
balanced categories to determine the value investors receive for the fees they
pay their fund companies. The measuring was done using the Fee-to-Performance
Value Indicator, which looks at how much of a fund's gross returns are used by a
fund company to cover costs ranging from manager salaries and research to
commissions for dealers and advisers who sell funds. The data, prepared by
Globefund.com, looked at fund returns for the five years to March 31.
The value indicator uncovered a mix of terrific fund values, mediocrities and
The worst of the worst were the 152 funds in the review that lost money in the
past five years, including the $1.1-billion AGF American Growth Class, the
$547-million BMO International Equity Fund and the $612-million PH&N U.S. Equity
Fund. It's not possible to calculate a negative value score, but these funds can
accurately be described as delivering no value at all for their fees.
One fund that offered poor value based on an actual score was the $289-million
Investors Canadian Enterprise Fund. Its value score of 88.6 means that fees
chewed up almost $9 of every $10 it earned over the past five years.
This fund's value score uses an MER of 2.95 per cent, although Investors Group
created a new version of this fund a year ago with a lower MER of 2.75 per cent.
Even at that level, the fund's MER is near the higher end for its category.
Other funds that generated more in fees than they did in returns were Ethical
Growth, a $463-million socially responsible mutual fund with a value score of
62.7, and the $843-million Altamira Equity Fund, a former fund industry
superstar with a score of 55.6.
The median value score for all funds in all categories measured was 25, meaning
about 25 per cent of returns went to cover fees. Among the funds easily beating
the median -- most of them notable for their low MERs -- was the $2.2-billion
PH&N Dividend Income Fund, offered by Vancouver-based fund company Phillips
Hager & North. With an MER that is less than half the average of its peers, this
fund managed a value score of 7.4.
Not all the top values were low MER funds, however. The $365-million Sprott
Canadian Equity Fund has an MER about a full point higher than the typical big
fund in this category, yet it managed a value score of 7.4 based on outstanding
The ROB study also assigned scores to fund companies based on their funds used
in the study. AIC Ltd., Investors Group and AGF Funds fared worst, with PH&N,
Franklin Templeton Investments and BMO Investments faring best.
PH&N has among the lowest MERs in the fund industry, in large part because it
pays zero commissions and fees to dealers. With a majority of funds, roughly a
full percentage point of the MER is accounted for by compensation to dealers and
financial advisers to sell funds. On the other hand, PH&N and some other low-MER
families have minimum initial investments as low as $5,000 or as high as
$100,000, so may not be attractive for everyone.
Investor advocates say data on MERs and performance demonstrates why it is so
important for investors to figure out the fees they pay for the funds they own
-- and to understand that there are also costs not included in the MER, such as
Ken Kivenko, a spokesman for the Small Investor Protection Association, says
many surveys have found that a majority of mutual fund investors don't realize
they pay any fees at all, because they are built in to the cost.
Mr. Kivenko says it is surprising that some mutual funds tend to attract
billions of dollars despite their uncompetitive fees, but he says he thinks this
is because many investors don't know the details of what they are buying.
Although the MER is disclosed in the prospectus for the fund, many investors
don't read the lengthy document.
"It's a very inefficient market," he said. "Many people are smaller, retail
investors. They are not the most financially literate investors."
Other individual investors who own mutual funds have come to similar conclusions
Jason Sorby says it was three years ago that he had what he calls his "MER
awakening," waking up to the link between the management expense ratios on his
funds and their returns.
"I realized I was sitting on a bunch of funds that were performing average at
best, so I started doing my research." said Mr. Sorby, a 34-year-old engineer at
a Winnipeg refrigeration firm.
He concluded that the fees were biting too deeply into returns. The next step
was to seek out funds with lower MERs. "Less money being taken off the top over
the long term has got to help," Mr. Sorby said. "It gives the manager a leg up
over some of the funds where they're charging more."
But experts in and around the fund industry have long played down the importance
of choosing funds based on their MERs.
Ian Filderman, director of mutual funds for Bank of Nova Scotia's wealth
management arm, says the MER is most important in sectors such as money market
and bond funds, where there are limited opportunities for managers to earn their
keep with shrewd decision making.
"As you move into the equity world, though, it's far less meaningful," Mr.
Filderman said. "When you're investing in an equity fund, the greatest source of
value added comes from the managers -- their investment style, the risks they're
willing to take in the portfolio, how well they're rewarded for those risks.
It's the core fundamentals of asset management that ultimately determine most of
Scott Mackenzie, president of independent fund rater Morningstar Canada, said
laggard funds that don't justify their fees are easy to find, but he believes
the industry as a whole provides good value for the MER dollars paid by
investors. He describes this value in terms of professional management,
portfolio diversification and features such as systematic contribution programs,
where people can invest small amounts on a regular schedule.
"Getting that for an MER of somewhere around 2.5 per cent is actually not a bad
deal at all," Mr. Mackenzie said.
Moreover, Murray Taylor, president and CEO of Investors Group, says it is unfair
to compare his firm's MERs to those of dissimilar fund companies. Unlike
discount fund companies such as PH&N or retail banks, he said Investors Group
provides more full-service financial planning to its clients, which costs more.
He says Investors Group has MERs "in the middle" of the pack of similar fund
It is a more expensive business model than "running into a bank and ordering
something across the counter," he said, adding that unitholders are not fixated
on MERs, and are generally highly satisfied with the service they receive.
David Feather, president of Mackenzie Financial Services Inc., said his firm has
been working with the advisers who sell its products to hone a message about the
value that investors receive for the fees they pay. This includes the expertise
of the adviser, the access to products and services offered by the fund company,
and the performance of the funds. In Mackenzie's case, a recent analysis by the
company showed that its nine biggest funds all outperformed their peer groups
and their benchmarks over the previous seven years.
"We think [value] is probably one of the bigger issues to Canadians right now.
We've really been emphasizing this, more so than we have been on a product
However, Steve Geist, president of TD Mutual Funds, argues that it is important
to compete on MERs for those investors who are price conscious. He said TD's
lower MERs in key fund categories such as its money market and bond funds are a
key factor in their growth.
He said his funds' lower MERs are not entirely a result of the lower cost
structure of a bank. He said TD has also made a strategic decision to keep the
MERs low as a competitive factor. The huge TD Canadian Bond fund has an MER of
1.07 per cent, compared with an industry average of 1.83 per cent.
"It's the way we've designed the products," Mr. Geist said. "I think you have to
be consciously prepared to accept a lower profit margin."
Indeed, profit margins cannot be ignored as a factor in the level of fees
charged by funds. The mutual fund industry has been extremely profitable, even
during the period of market turmoil from late 2000 to 2002. Industry giant
Investors Group, for example, has seen its profit grow at a compound annual rate
of 24.3 per cent over the past five years.
Dan Hallet, a Windsor, Ont.-based independent mutual fund analyst, says MERs
should matter greatly to investors, because they are the only factor affecting
future performance that investors can know with certainty when they buy a fund.
As a result, he says lower expenses are a key factor in any investment decision.
Still, Mr. Hallet warns that investors cannot compare the expenses of completely
Some funds are indeed more expensive because they build in a fee that is paid to
the adviser who sells the fund, as compensation for providing a service to
investors who want the help. He says many investors need help with their money,
and should expect to pay something for the service.
But, he adds, he won't personally invest in funds with MERs higher than their
"It would be hard for me to justify paying 2.5 per cent [as an MER] even for a
really highly skilled manager, when I can pay 1.5 per cent for a really highly
skilled manager in the same asset class," he says. "One is not necessarily
clearly superior to the other."
There have been several detailed studies on the importance of MERs over the
years, and a frequent conclusion is that they matter a lot.
One such study was just completed by Gene Hochachka, who until recently was a
quantitative analyst for Phillips Hager & North. To get a fix on how MERs affect
fund performance, he looked at rolling rates of return for all funds over one-,
three- and five-year periods from 1986 to 2003.
Mr. Hochachka found that on average, each percentage point of extra MER leads to
a loss of one percentage point in performance, despite any differences in fund
managers' abilities. Put another way, it's difficult for the skill of a fund
manager to overcome the dead weight of a higher MER.
For this reason, Mr. Hochachka believes investors are better off emphasizing low
MERs than they are in seeking managers who will deliver big returns regardless
"If you have a way of choosing each year's top-performing fund for a particular
category, run with that," he said. "But in the absence of such a method -- and
there's none yet that I've been able to find -- your best bet is to go with a
Indeed, much research has shown that funds with higher MERs often have lower
returns because of the impact of the high fees.
Mr. Tang at Fundamental Research, for example, looked at 116 Canadian equity
funds in a study last year, and found that funds with above-average MERS had
below-average performance over the previous 10 years, both in terms of
underperforming the S&P/TSX index and underperforming the average of their
"Contrary to logic, when purchasing mutual funds, it is not necessarily the case
that the more you pay the better-quality product you receive," he concluded.
On the other hand, a study by John Chan of FundMonitor.com found that higher
MERs could be worth the money in specialized funds where the expertise of the
manager might make more difference. Of the fund categories he studied, global
science and technology funds and emerging markets funds were the only ones where
there was a positive correlation between expenses and returns.
"If they put more money into doing research, or travelling, or doing due
diligence, you find it does pay off sometimes," Mr. Chan said.
But, he warned, it was still a "fairly weak" positive correlation even in
specialty funds. "So it's not that strong a relationship," he added. "In
general, you will save money off lower MERs."
But investor advocates like Mr. Kivenko believe customers will be slow to take
charge of MERs until more of them understand the costs they are paying.
To accomplish that, he believes the mutual fund industry should put specific
information about fees on investors' account statements. Mr. Kivenko said the
fees should be disclosed in dollars and cents for each investor's account, not
just as a generic percentage, so that investors know exactly how much they are
personally paying each year.
It is a topic that has been tackled in a concept paper published by the Ontario
Securities Commission, which has proposed a new Fair Dealing Model to change
most aspects of the relationship between the financial services industry and its
clients. Among the proposals for change, the OSC paper calls for full
transparency of all costs paid by mutual fund investors, including the actual
amounts paid by an investor each year.
But Mr. Kivenko, who is a member of the Fair Dealing Model's investor reporting
working group, says there is opposition to the details of the proposal from some
in the fund industry, who complain about incurring additional costs. So the
outcome for investors is far from guaranteed.
"They don't want to do it," he said. "The industry is fighting. A few companies
are supporting it, but most of them don't want that kind of transparency."
The best and the worst
A lower fee-to-performance value indicator suggests a better deal for investors,
with fees eating up less of a fund's returns. Includes only funds with more than
$200-million in assets under management.
Top 20 funds
Fund name: Company name: Annualized Five Year Return: MER: Return + MER: Fee-to
performance value indicator: Net assets ('000):
Ferique Equity: Gestion FERIQUE: 8.89%: 0.62%: 9.51%: 6.52%: $235,125
PH&N Dividend Income: Phillips, Hager & North Inv Mgmt: 14.67%: 1.18%: 15.85%:
Sprott Canadian Equity: Sprott Asset Management Inc.: 42.89%: 3.45%: 46.34%:
PH&N Bond: Phillips, Hager & North Inv Mgmt: 6.99%: 0.60%: 7.59%: 7.91%:
Sceptre Equity Growth: Sceptre Investment Counsel Ltd.: 19.01%: 1.72%: 20.73%:
Quebec Professionals Cdn. Equity: Fonds des Professionnels Inc.: 9.72%: 0.97%:
10.69%: 9.07%: $242,244
Renaissance Canadian Income Trust: CM Investment Management: 18.17%: 1.90%:
20.07%: 9.47%: $715,185
Scotia Canadian Dividend: Scotia Securities Inc.: 10.95%: 1.18%: 12.13%: 9.73%:
RBC O'Shaughnessy Canadian Equity: RBC Asset Management Inc.: 14.81%: 1.63%:
16.44%: 9.91%: $673,152
CI Signature High Income: CI Mutual Funds: 14.56%: 1.61%: 16.17%: 9.96%:
ABC Fundamental Value: ABC Funds: 17.89%: 2.00%: 19.89%: 10.06%: $356,920
Elliott & Page Growth Opportunities: Elliott & Page Ltd.: 24.65%: 2.84%: 27.49%:
PH&N Canadian Equity: Phillips, Hager & North Inv Mgmt: 9.73%: 1.16%: 10.89%:
Legg Mason Canadian Active Bond: Legg Mason Canada Inc.: 6.03%: 0.72%: 6.75%:
CIBC Monthly Income: CIBC Securities Inc.: 10.06%: 1.21%: 11.27%: 10.74%:
Beutel Goodman Canadian Equity: Beutel Goodman Managed Funds Inc.: 11.24%:
1.36%: 12.60%: 10.79%: $265,841
RBC Canadian Index: RBC Asset Management Inc.: 6.75%: 0.84%: 7.59%: 11.07%:
Saxon Stock: Saxon Funds: 14.93%: 1.87%: 16.80%: 11.13%: $225,772
TD Canadian Index: TD Asset Management Inc.: 6.69%: 0.85%: 7.54%: 11.27%:
RBC Monthly Income: RBC Asset Management Inc.: 9.45%: 1.21%: 10.66%: 11.35%:
Bottom 20 funds
Investors Canadian Enterprise*: Investors Group: 0.38%: 2.95%: 3.33%: 88.59%:
Clarica Canadian Diversified: CI Mutual Funds: 0.81%: 2.70%: 3.51%: 76.92%:
Ethical Growth: Ethical Funds Inc.: 1.46%: 2.46%: 3.92%: 62.76%: $463,489
Desjardins Select Canadian Balanced: Fonds Desjardins: 2.44%: 3.14%: 5.58%:
Talvest Cdn. Asset Allocation: Talvest Fund Management: 2.06%: 2.61%: 4.67%:
Altamira Equity: Altamira Investment Services Inc.: 2.17%: 2.72%: 4.89%: 55.62%:
IG Sceptre Canadian Equity*: Investors Group: 2.69%: 3.22%: 5.91%: 54.48%:
Desjardins Canadian Balanced: Fonds Desjardins: 1.90%: 2.19%: 4.09: 53.55%:
Scotia Total Return: Scotia Securities Inc.: 2.32%: 2.56%: 4.88%: 52.46%:
Investors Asset Allocation*: Investors Group: 3.00%: 3.20%: 6.20%: 51.61%:
Talvest Cdn Equity Growth: Talvest Fund Management: 2.60: 2.76: 5.36: 51.49:
Ethical Balanced: Ethical Funds Inc.: 2.34%: 2.42%: 4.76%: 50.84%: $428,536
TD Balanced: TD Asset management Inc.: 2.45%: 2.33%: 4.78%: 48.74%: $838,979
CIBC Balanced: CIBC Securities Inc.: 2.89%: 2.43%: 5.32%: 45.68%: $1,039,267
CI Canadian Asset Allocation: CI Mutual Funds: 3.07%: 2.55%: 5.62%: 45.37%:
Desjardins Canadian Equity: Fonds Desjardins: 2.63%: 2.19%: 4.82%: 45.44%:
Desjardins Diversified Moderate: Fonds Desjardins: 2.66%: 2.04%: 4.70%: 43.40%:
IG AGF Canadian Balanced*: Investors Group: 4.28%: 3.22%: 7.50%: 42.93%:
Renaissance Canadian Growth: CM Investment Management: 3.33%: 2.48%: 5.81%:
AIC Diversified Canada: AIC Ltd.: 3.34%: 2.43%: 5.77%: 42.11%: $3,246,935
*Investors Group has created a new version of these funds with an MER that is
lower by about 0.2 of a percentage point.
Canada's 15 largest mutual fund companies
The companies show a wide range of value for investors compared to the fees they
pay. A lower value indicator suggests a better deal for investors, with fees
eating up less of a fund's returns.
Ranked by value indicator
Fund company: No. of funds used in calculation: Average 5-year return of funds
used in calculation: Fee-to-performance value indicator: Assets of funds used in
fee-to-performance indicator calculation
AIC Ltd.: 1: 3.34%: 2.43%: 42.11%: $3,246,935%
Investors Group*: 23: 5.44%: 2.88%: 38.62%: $29,078,564
AGF Funds Inc.: 7: 6.94%: 2.55%: 32.35%: $7,969,032
CI Mutual Funds: 29: 7.18%: 2.53%: 29.03%: $17,571,494
CIBC Securities Inc.: 13: 5.99%: 2.07%: 28.59%: $7,411,171
Dynamic Mutual Funds Ltd.: 17: 7.41%: 2.62%: 28.07%: $4,436,236
Scotia Securities Inc.: 7: 5.98%: 1.72%: 25.47%: $6,272,810
Mackenzie Financial Corp.: 22: 7.84%: 2.42%: 25.35%: $18,399,034
TD Asset Management Inc.: 17: 7.17%: 1.80%: 22.05%: $14,672,647
Fidelity Investments Canada Ltd.: 7: 8.91%: 2.37%: 21.77%: $14,693,942
RBC Asset Management Inc.: 13: 7.55%: 1.82%: 21.56%: $25,202,891
AIM Trimark Investments: 10: 9.02%: 2.15%: 20.71%: $14,206,755
BMO Investments Inc.: 7: 8.13%: 1.89%: 19.85%: $8,549,756
Franklin Templeton Investments: 8: 8.74%: 1.67%: 17.39%: $1,561,219
Phillips, Hager & North Investment Management Ltd.: 8: 7.68%: 1.01%: 12.15%:
*Investors Group introduced lower MER versions of some of its funds a year ago,
which together would reduce its fee-to-performance score to 37.45.
Fee-to-performance value indicator is based on funds with positive five-year
returns as of March 31, 2004; funds with negative five-year returns were not
included in the calculation; Study excludes funds with less than $10-million in
assets; Fund categories included in data for chart are: Canadian equity,
Canadian dividend, Canadian balanced, Canadian tactical asset allocation,
Canadian income trust, Canadian bond. Average are not asset-weighed.
A lower fee-to-performance value indicator suggests a better deal for investors,
with fees eating up less of a fund's returns.
The data in the Report on Business study includes only funds with five-year
track records and positive returns. Because the data excludes newer funds and
funds with negative returns, the averages shown may differ from the broader
industry averages when all funds are included.
Asset class: Number of funds included: Average 5-year annualized return: Average
MER: Average fee-to performance value indicator
Canadian Balanced: 109: 5.60%: 2.19%: 30.45%
Canadian Bond: 66: 5.51%: 1.54%: 22.14%
Canadian Dividend: 30: 10.04%: 2.07%: 17.84%
Canadian Equity: 146: 8.51%: 2.44%: 26.84%
Canadian Equity (Pure): 26: 8.04%: 1.76%: 21.78%
Canadian Income Trusts: 10: 15.63%: 2.04%: 13.30%
Cdn. Tactical Asset Allocation: 19: 4.89%: 2.35%: 36.20%
The ROB data on five-year average returns and average MERS for funds that invest
outside Canada vary significantly from industry norms because the Globe's
calculation included only funds with positive five-year returns. Many global,
international and U.S. funds had negative returns over the past five years, and
are not included in the averages.
**Asset class: Number of funds included: Average 5-year annualized return:
Average MER: Fee-to-performance value indicator: Average 5-year return of all
funds including negative returns: Average MERs of all funds including negative
Global Equity: 37: 6.11%: 2.73%: 41.62%: 0.3%: 2.98%
International Equity: 8: 3.10%: 2.07%: 44.09%: -2.1%: 2.70%
U.S. Equity: 12: 5.31%: 2.37%: 42.30%: -5.0%: 2.78$
Mutual funds with negative five-year returns have delivered investors the worst
value for the fees charged. This chart shows some of Canada's worst-performing
mutual funds, and the management expense ratios (MERs) they charge.
AGF American Growth Class.....-11.01%......3.08%....$1,094,321
MD U.S. Large Cap Growth.......-8.49..........1.36.........508,312
BMO International Equity...........-6.37..........2.58..........547,372
PH&N U.S. Equity...................-6.16..........1.18.........612,207
TD International Equity..............-5.76...........2.84.........507,677
Fidelity Growth America.............-4.87...........2.61.........703,200
BPI Global Equity.....................-4.57..........2.53..........736,818
CIBC U.S. Equity index..............-3.52..........0.96...........557,230
AIM Global Theme Class............-3.44..........2.83...........555,537
RBC U.S. Equity......................-2.73..........2.19.........1,240,256
TD Global Select.......................-2.63..........2.59...........626,633
Fidelity International Portfolio.........-2.18..........2.59........3,779,347
Mackenzie Select Managers..........-1.87..........2.57...........690,676
Templeton International Stock.......-1.26...........2.98.........3,170,834
AIC Advantage II......................-0.58..........2.69.........1,735,029
Clarica Canadian Blue Chip...........-0.52..........2.74............530,721
Mutual fund management fees are shared among several recipients. The Mackenzie
Ivy Canadian Fund, for example, has a 2.51 per cent management expense ratio.
With a $10,000 investment, the $251 fee breaks down like this each year:
Operating expenses: $35
To the seller (broker, financial planner, etc): $98
To the fund company: $102
SOURCE: MACKENZIE FINANCIAL CORP.
What You Pay
Here are the typical fees paid in one year on an average Canadian mutual fund
portfolio of $80,000, using average management expense ratios for each asset
Fund category.....for category....Investment....MER paid
Over the long run
The difference between a higher or lower Management Expense Ratio can have a
huge impact on your investment return over the long term. Take the following
example of a $10,000 investment of 20 years*.
Gross annual return before MER...............9.5%............9.5%
Net annual return after MER.....................7.0%............8.0%
Profit before fees...............................$51,416...........$51,416
Profit after fees.................................$27,847...........$35,998
+ original investment............................$10,000...........$10,000
= final investment value.........................$37,847..........$45,998
*Assuming no-load funds that charge no other fees
SOURCE: MUTUAL FUND FEE IMPACT CALCULATOR AT WWW.INVESTOR.CA
Rapid trading in mutual funds bears marks of market timing
Mechanics of market timing, who does it, who doesn't and why
Proposed rules for fund governance favour industry, critics say
Not all fund managers have suffered the same pain as investors
Fees and fund performance don't always go hand-in-hand
Segregated fund fees on the rise
Dos and don'ts for the investors
On the Web
Follow the mutual fund series this week on our website http://www.globeandmail.com