White comes full circle on fund fees|
Jonathan Chevreau • The National Post • Saturday January 31, 2004
'Costs matter' theme may not sit well with seminar sponsors
When it comes to mutual funds, investment management costs matter. Who says? None other than "Doctor" Jerry White, the financial author, speaker and broadcaster.
"Costs matter" is the theme of White's Money Talks show on the CHUM radio network this weekend, which may seem a startling departure for those who have followed White's controversial career. When mutual fund mania held sway in the 1990s, he was one of a handful of seminar speakers who could be relied upon to draw prospective investors. Many of the 5,000 seminars he has delivered were sponsored by companies selling funds with high management expense ratios (MERs).
"This sure doesn't sound like the Jerry White of the 1990s, who encouraged his uneducated-in-financial-literacy seminar attendees to [buy] high-MER rear-load funds with redemption schedules severely restricting their investment flexibility," says Joe Killoran, a former broker whose investorism.com site champions more disclosure for mutual fund investors.
White says he has never recommended financial products, nor does he promote borrowing money to purchase investments.
From his various pulpits White influences many wealthy Canadians with his aggressive approach to investing, taxation and estate planning. He prefers the tax benefits of Universal Life (life insurance with an investment component) to RRSPs. He believes the latter should be "melted down" as retirement approaches. He was also big on charitable tax shelters, the "buy low, sell high" tax schemes shut down by Ottawa in December. These are all topics on which we don't see eye to eye.
But on one subject we now agree violently: that when it comes to investing in funds, management and administrative costs matter immensely, and that Canadian fund MERs must drop.
I was surprised when, in asking me to be a guest on his show, White revealed he has embraced the "costs matter" mantra. After all, this would not have been a welcome theme for the firms sponsoring his seminars.
Yet his new stance indicates just how mainstream consumer resistance to excessive MERs has become. For years, fund costs were the focus of a small band of "indexers" and believers in little advertised low-fee no-load funds.
Indexers prefer passively managed, low-cost index funds or exchange traded funds (ETFs), believing it's impossible to consistently beat the market by picking securities. The ringleaders of this camp are Norman Rothery of The Stingy Investor, a newsletter on low-fee funds, and the anonymous indexer going by the non de plume Bylo Selhi, found at www.bylo.org.
For fund company executives, "indexer" has long been a term of derision. The feeling was largely mutual (no pun intended). The indexers scoff at "actively managed" funds with MERs of 2.5% or 3% and criticize the high-MER segregated funds which underlie Universal Life policies.
If you want to know why they avoid these investments, point your Web browser to MER-impact calculators at www.investored.ca or www.iunits.com. These show how high MERs slash returns by 50% over a normal 25-year investing horizon.
Jerry White is an unexpected convert to this way of thinking, but he articulates his new religion passionately in an essay entitled "Costs Matter: the X factors": "Few mutual funds, if any, can outperform markets over time," he writes. "Therefore, the costs you incur can greatly diminish total returns -- especially over time."
He even invokes the patron saints of indexing: Vanguard Funds founder John Bogle and his Canadian equivalent, Ted "Muzzled" Cadsby of CIBC Securities Inc. (In 1999, Cadsby wrote a book called The Power of Index Funds; soon after, the bank discouraged him from making further public statements suggesting that costs matter.)
White reprises Bogle and Cadsby surveys of the negative impact of MERs on fund performance. "This is especially relevant and important in periods of sustained losses such as 2000 to 2002," he writes. "It is also especially critical for bond funds and money market investments, where the costs are the prime differentiating factor of returns."
White says he once sympathized with the arguments Canada's fund companies used to justify their fees, but no longer buys them. The companies argue that high fees are necessary because of our small population, the need to create bilingual materials and the burden of filing with 10 securities commissions. As White points out, "performance would have to be spectacularly greater over time to validate the higher fees in comparison with exchange-traded or index-based funds."
Even actively managed equity funds -- the bread and butter of the fund industry -- should not have MERs above 2%, White says (most are 2.5% to 3%). Furthermore, he argues the companies should pass savings along to consumers as funds grow and the firms realize economies of scale. He suggests fees should be cut by 5 basis points (0.05%) each time a fund grows by $200-million.
White says his new views developed gradually the past two years. But however his conversion occurred, it should be a wake-up call to Canada's fund industry.
The days of 3% MERs are numbered, predicts advisor Adrian Mastracci of Vancouver-based KCM Wealth Management. "I expect ETFs and index funds to give [mutual funds] more of a run for the money and they will have to bring down costs." Indeed, Mastracci believes total fees on portfolios below $500,000 shouldn't exceed 1.5% and on larger portfolios they should be closer to 1%.
"Costs always mattered," he says.