Management Expense Ratios

Tarheel--Take a look at the Premium Services tab near the top of this page, log into the Fund Analysis and Comparison Tool, then you can see MERs in the tables.

Buy the next Globe when they have their monthly report on mutual funds, and you will find the mean, median, highest, lowest MERs in a group.

PH&N, Bissett, and Scudder make a concerted and serious effort to provide lower MERs on their funds, which is one reason they do well. Some of the banks are offering reduced MER index funds for RRSPs (CIBC, TD).

Hi MERs are not just evil, they will rob you of your money.

MERs are NOT in evil. MERs that have been inflated to support trailer fees are the problem.

In a mutual fund, we investors pool our money so that we may take advantage of professional money management. The adminstration of the fund has specific costs such as record keeping, audits, legal fees etc. These things must be payed for. Do you expect someone to manage your money at no expense whatsoever? If you want to avoid MERs altogether why don't you just pick your own stocks and bonds and manage your own portfolio. BTW, you'll still have to pay brokers fees and the like.

Happy Investing.

Bill,

Let me ask you this: How come mutual funds sold in the U.S. have, on average, MER's that are 1%-1.5% lower than Canadian managed funds? Why do Canadians pay 2.3% MER and Americans pay 1% on essentially the same fund. Can that much of a difference be soley contributed to trailer fees? Do they have trailer fees in the U.S.? How does Scudder manage to keep fees so low (in both Canada and the U.S.)?

> What is a fair MER for a Canadian equity fund? International Equity Fund? Equity Index Fund?

Interesting question...here's my opinion.

Managed Canadian Large Cap Equity Fund: <1.5%

Managed Canadian Small Cap Equity Fund: <2.0%

Managed International Equity Fund: <2.25%

Canadian Index: <0.5%

International Index: <0.75%

Of course, the lower the better on the index funds.

Regards, Ted

To begin with, Scudder is LOSING money on their current MERs. Call it a loss leader. Can't remember where I read the article on it.

Canadian costs are significantly higher than the US - some reasons for that: Multiple jurisdictions to register in. In Canada, each province has it's own securities commission, each fund must file with each commission. That costs $$, in the US, one commission, the SEC.

US MERs do NOT reflect all the costs associated with the fund that Canadian ones do. There are costs that are charged directly to the individual investors account. Some would argue that this better discloses the actual costs to the client, but it sure doesn't make it easy to compare Cdn funds to US ones.

Economies of scale. US funds are bigger. You'll note that one of the largest Canadian funds has one of the lowest MERs (Trimark). I would expect that as funds become larger MERs will come down.

Personally, I believe the whole MER issue to be a bit of a Red Herring. MERs should be a PART of the equation, but I hear too many people focusing on them to the exclusion of everything else.

Rob, forgive me but I just can't seem to resist being a thorn in your side ;-)

"I hear too many people focusing on them [MERs] to the exclusion of everything else."

They appear to be in good company. William F. Sharpe (who received the 1990 Nobel Prize for Economic Science for his pioneering work in investment theory, particularly in exploring the relationship between risk and return) had this to say when asked how he decides on which active funds to select:

"The first thing to look at is the expense ratio; the second' thing is the turnover rate; the third thing is some measure of past performance, probably the historic Selection Sharpe Ratio, that is, added return per unit of added risk relative to a meaningful benchmark. But if you had to look at one thing only, I'd pick expense ratio."

Oh thank-you Bylo!!

Yup, there are those who think MERs are the most important thing - I don't. I think they're important, but to choose a fund based solely on MER?? nope.

Scudder has capped their MERs and is paying anything above from their own pockets, until the funds are large and efficient enough to support the low MERs. That is free money for us, and is a way for them to gain market share. I am very impressed.

For large cap funds that cover more efficient markets, MER is the FIRST and FOREMOST consideration! It is of incredible importance for a portfoios long term return. Financial Planners will argue otherwise since they have vested intersts in selling load and high MER funds so the commissions and trailers will finance their vacations in Bimi.

Tarheel:

You asked:

How come mutual funds sold in the U.S. have, on average, MER's that are 1%-1.5% lower than Canadian managed funds? Why do Canadians pay 2.3% MER and Americans pay 1% on essentially the same fund. Can that much of a difference be soley contributed to trailer fees?

Do you think fees would be so high if we were legally capable of purchasing funds based in the US - for half the price? I doubt it. I think that the only reason there is such a big gap in fees is because we cannot buy the US products. If we had free trade with mutual funds, I can assure you fees would be much lower.

Do they have trailer fees in the U.S.? How does Scudder manage to keep fees so low (in both Canada and the U.S.)?

They do have trailer fees in the U.S. but they are called 12(b)-1 fees (reference to securities legislation I believe). And I don't believe these fees are factored into the published MERs of the funds - but I could be wrong on that point.

Scudder waived all of its management fees for the first year or so as an introductory promotion. They have since began charging the management fee but still have a cap on their MERs. But beware because the prospectus says nothing of this cap, the prospectus allows them to charge full fees to the fund. As soon as they decide to lift the MER cap, their fees will rise. And by the way, Scudder does pay a trailer of 0.25% per year to independent advisors.

Personally, I believe the whole MER issue to be a bit of a Red Herring. MERs should be a PART of the equation, but I hear too many people focusing on them to the exclusion of everything else.

O FA,

There is nothing illegal about Canadian residents buying US mutual funds through a US broker. Why pay TD an MER of 0.72% for their S&P 500 index fund when you can buy the same index from Vanguard for an MER of 0.20% using a US broker like Waterhouse (who ironically is owned by TD)? I don't.

Yes 12(b) trailers are charged separately from MERs. That's partly so that clients of fee-only advisors don't have to pay twice for advice. Nevertheless MERs in the US are significantly lower than in Canada.

Another irony: The Canadian version of Templeton Growth is about the same size as the US version yet the former has a much higher MER than the latter. Go figure.

For those who are interested you may want to check out the following article that shows that MERs have increased during the 90s while funds have gotten larger. No economies of scale here.

I've seen the chart - what it doesn't show is the increase in returns by having professional management (we all hope). The question isn't what you are paying, but what value you're getting for what you paid.

As I mentioned above, the Canadian regulatory market is considerably more expensive to deal with than the US one.

As Bylo mentioned, the 12(b) fees are charged directly to the client, and for the reasons he mentioned. Reading Krembil's comments, I would expect that over the next few years we will see an "un-bundling" fees here in Canada, too.

To Rob:

In an earlier note you said that MERs are a bit of a red herring and should only be viewed as part of the equation. I agree -- but another part of the equation is the underperformance of managed funds (on average) relative to a valid benchmark index. Do an analysis of funds on virtually any timeframe and you will see this underperformance. For example, over the last 10 years only 1/3 of Canadian equity funds have beat the TSE.

Canada's high MERs have nothing to do with performance. They reflect the mutual fund industry's desire to gain market share using every marketing tool possible except price competition.

Tarheel,

If you can get your hands on the Financial Post for Thursday, Jan.29, there is a special supplement which contains an article called " Making Sense of MERs".

One important thing to keep in mind when comparing MERs to American versions is that there is an economy of scale. Fixed costs will be higher as a percentage of the total assets of the fund.

Additionally, "While the MER is all-inclusive in Canada, south of the border there are 12b1 fees. or additional marketing fees, that aren't included in MERs. These are used to offset marketing costs, such as trailer fees, that are paid to funds". So we can see that trailer fees have a significant impact on how Canadian MERs are calculated. Maybe we should have another acronym for the Canadian version of the MER. Maybe MERA, or would that be MER-eh?

My point is that MERs are a reflection of the cost of getting professional management for the average investor. They are not in themselves evil. Could they be lower? I certainly think that some measures can be taken to make thinks more efficient. I for one could do without all these expensive commercials and glossy literature. Trailer fees could be seperated out. Companies Like Bissett and PH&N are good examples of low MER fund companies.

I sometimes get the impression that some investors do not want to see any MER whatsoever. What we need to understand is that all investment vehicles have a built in cost. As long as we are receiving a value-added service for the fees being paid, I'll be happy. Even GICs, which seem on the surface to be free of these type of expenses, have a built in cost. It's just called "the spread". When you look at it this way, GICs are very expensive. It's like paying a front-end load every year.

Rob, regarding your statement of expectation that MER's relate to ...

has not proven to be true either here or in the US. The funds in both countries have, on average, increased in size, even as the MER's have swelled. I can dig up the recent article I read in Forbes, Bloomberg or wherever that gave the exact numbers, but the trend both here and in the US is a continue to "gouge the investor" attitude on the part of fund companies.

Just a part of their shortsighted conduct, which includes an unwillingness to communicate directly with investors (their absence on this forum being a prime example of that).

One thing you could not accuse an investor of being is greedy. Yeh Right. But when the fund company who takes the risks with your money gets greedy you get all bent out of shape.

Mutual Funds suck and their Hey-Day are nearly over and the next wave of gouge the public will appear. Do not fear!

If Mr. Krembil followed through on unbundling then the FE-load versions of his two flagship funds would have MERs of ~1%.

Now that might cause a bit of a stir at PH&N, Bissett, Scudder, et al.

I've seen the chart - what it doesn't show is the increase in returns by having professional management (we all hope). The question isn't what you are paying, but what value you're getting for what you paid.

It is no secret why Bissett and PH&N funds are consistently found in the upper quartiles year after year. They are no better at picking stocks than their competitors. What they are better at is minimising their costs. And since net return = gross return - MER, the lower the MER the higher the net return. That too falls under the rubric of professional management - a good manager keeps his costs low. So I would agree with you, Rob, that professional management makes a difference but only in the influence that it has on the MER.

There is an article on this at the Globe Fund site. Go to SEARCH the Globe And Mail, then to Search mutual fund articles and click on Jan 31/98. Sorry I don't know how to take you there with a simple click.

Yikes! Seems everyone's got something to prove me wrong with today, eh?

My point is that I don't believe that MER (or even pure % return) is the sole way to evaluate a fund. Nor do I believe it should be the only way to evaluate - as some here would have you believe.

Are MERs important? YES! Could the come down? YES! Will they? YES! Trimark's Krembil is a case in point. I don't think it'll be too many years from now when we will see a complete "unbundling" of the MERs. Trimark is one of the first mutual fund companies in Canada to hit the "economies of scale" plateau that has enabled them to keep MERs low. Like Bylo said, unbundle the MERs and suddenly Trimark is giving some of the "low MER funds" a real run for the money on price. (Trimark is the only mutual fund company in Canada currently that is self-funding for their DSC funds. There is a point where size is advantageous - there's just not many there yet in Canada.)

You know as a pretty Proud Canadian, I get sick and tired of things like the countries to bit, there aren't enough people, there isn't enough money available, not enough customers and 'Economies of Scale'. It is mostly hogwash.

I tried to check the salaries of top money managers in relations to MER's and I didn't get too far but for the amount of money invested to keep blaming high costs, taxes etc on economy of scale is terrific cop out. Canada, is the highest taxes, lowest savings rate in the free world reported by the committee of EECo or something. We need a damn good revolt and I am ready to start my own. Politicians underpaid, property taxes .. oh forget the whole damn thing. This Country and I am a 4th generation born here, not that means too much..... Sucks ..

Rob, the Economies of Scale 'shtick' isn't proven out by reality. Economies of scale result from getting larger: are you trying to tell us that Trimark is the only company to reach that 'plateau'. Come on .... even US funds have increased their MER's - on average - even while their funds have gotten larger.

You ignore the facts, and dance around the issue. Economies of scale is the fund companies 'big red herring'. Sorry to see you get sucked in by it.

Bylo:

Your credibility is pretty good, but if you start quoting Maclean's to buttress your position, you're going to lose it - quickly. If the popular press has a view, you can be almost certain that the reality is different. Journalists are much more interested in (1) meeting personal deadlines (by writing simplisitic nonsense if necessary); and (2) selling product (by writing to the lowest common denominator if necessary)

It doesn't take a rocket scientist to know that this whole fund market is as crooked as any other corporation run service.

The flashy cars, the flashy advertisments, the running close to the limit on honesty in advertising.

Mutual Funds where supposedly set up as an alternative to the Stock Market to guard against risks. Has it done so. Yeh to some degree but at staggering costs to the users.

Like I have said before, MF's to me have not been kind but that was because of our choices. The stock markets may or may not have been as kind.

I invested $35G in MF's. Since then none. Returns of almost all funds (except for the odd lucky strike) are well under the benchmark I was verbally guaranteed of 10%. Self selected Stocks/Bonds have returned at least 12%. I know what my costs are going in and coming out. I know what my profit/Loss is at any given point in time and I like that.

Gordon:

It also doesn't take a rocket scientist to realize that gross generalizations based on one person's opinion are totally invalid -- especially in consideration of the millions of people mutual funds have helped meet their financial goals, within their risk tolerance.

And if you despise mutual funds so much, do everyone else here a favour (especially those novices you may be misleading)and take your scorn and unfounded opinions off of this MUTUAL FUND forum.

thbox,

The first sentence of my post reads "even the so-called 'popular' media". I thought my sarcasm was patent. ;-)

While the media has its own pressures and agendas (which often are hidden) there are some good journalists out there. Everything one reads (including here on the web) ought to be treated with a healthy dose of skepticism.

Hi there, Bylo N Rib Rob

Do you remember where ya saw those comments on fund expenses by William Sharpe?

thanks

Tightwad,

Patrick Bloomfield's column in the Financial Post today addresses issues raised on this thread.

I would put a link here, but this column is currently not available online due to site construction. The title is "Advice no substitute for research" and it's on page 26 of the Feb 11th FP.

Tightwad,

Sharpe's quote is from the transcript of an interview on the Vanguard website on www.vanguard.com. I'd provide the specific link but I can't seem to get to their website right now. Go to their website and do a search for "Sharpe interview".

Ditto for Bloomfield's column in today's FP. I can't get to their website.

(For any geeks who might care, the cache on our DNS server seems to be corrupted. Gotta go and flush it...)

To Tightwad-

Sharpe's comments re expenses can be found in the following interview.

OK, had to give that Microsoft (surprise?) DNS server a swift kick in the posterior. Now all is well ;-)

I think all this talk about MER is a red herring. I sell large amounts of mutual funds at a larger brokerage house. When I reach a level of sales, some of the fund companies give me an order for their funds. I just write the ticket and I just made $3,000 in commissions. These transactions are disclosed in the prospectus. The funds have to keep the distribution network happy, and in turn I keep my clients happy....

Big Producer--well that just proves the point doesn't it?

MERs are the most important consideration when choosing large cap funds in efficient markets! Low MERs! Low MERs! Low MERs! This is EXTREAMLY important.

Why should I shell out big bucks for a fund so it can pay you commissions and trailers to sell the funds? I want to keep my investment money in my own pockets, I don't want to fatten yours.

Jennifer, I guess the same could be said about your opinion, however, we are all allowed one.

You want to think everything is fine and Rosy, be my guest. I bet MF'ers in 20 years from now will be singing their own kind of story.

Gold is going to go up to 5.00 too.

As a Canadian living down here in the US (with most of my mutual funds up in Canada) I can tell you one big reason for Canada's higher MERs. When back home in Ont I am completely overwhelmed by the MF adds: Macleans (8 full pages in the last issue), CBC's The National, most bus stops, pages and pages in the newspapers, there's no end to it. There is only a tiny fraction of that much advertising down here. I think the earlier comment about the costs being that high because that's what the market will bear is exactly right. Case in point, I just bought the Franklin-Templeton Small Cap Fund down here. With all costs included it is less than half price of the Canadian fees and it is EXACTLY the same fund. Same with Fidelity.

Jennifer - you must be the cheerleader for the 'status quo'. I suspect that you're on 'the pad' of the fund companies.

Let's face it, the MER's are outrageous for no value added (proven by MF's inability to beat the benchmarks). The commission FP's are overpaid, and few would suggest something useful and outperforming for their clients, such as index funds.

All in all, it's getting to be more like lawyers (if you can't see their hands, it's because they're in your pocket), or used car salesmen (if their lips are moving you know they're lying).

Hey, good luck fund companies - the tenor of the investor is definately turning against you from my observations. Bon chance!

Bylo, PK and jd: Thanks for helping to track down Prof. Sharpe..

CDNINAMER....could you let us know your e-mail address???

Right on Apple-Picker! The m/f industry is rotten to the core (no pun intended). I still squirm when I think of those thousands of dollars I paid in commissions to line the pockets of commission- driven financial planners. As for those riduculously high MERS, don't get me started....

When I started buying funds (in the early 80's), they charged 9% up front and told me in the grand scheme of things, this was nothing. Try compounding 9% of initial contributions over 30 years buddy and tell me it's nothing! If I had bought no-load index funds, I'd be rich now, instead of them. Sorry to all the competent, hard-working and committed financial planners out there, but the business really does have to change. Many investors are educating themselves and beginning to understand just how little value they are getting for their hard-earned money. Caveat Emptor.

Apple-Picker: for sure you are not including the very religious Sir John Templeton in your list! After all he always starts his annual meetings with a prayer (could it be that he's praying that investors in his funds will never find out how deceptive the mutual fund industry is?) ;-)