A recent Morningstar report shows how egregiously bad mutual fund fees in Canada are when compared to other nations. The report found the median asset-weighted expense ratio to be 1.31% for fixed-income funds, 2.31% for equity funds and 0.80% for money market funds. These fees were the highest among the 22 countries in the survey for equity funds, third highest for fixed-income funds and tied for highest for money market funds. Morningstar found the fees so bad that they ranked Canada an F, a grade that none of the other 21 countries received in any of the four categories — regulation & taxation, disclosure, fees & expenses and sales & media — in the survey.
Morningstar also attempted to address claims made by the Canadian mutual fund industry that reports such as this do not make an apples-to-apples comparison:
Claim: Canadian mutual funds contain “trailer fees” that are used to pay for distribution costs, while funds from many other countries do not.
Counter: With rare exception, every country’s funds pay for distribution costs out of their funds’ total expense ratios.
Claim: Canadian mutual funds have lower front-end load charges than those in other countries, thus it is understandable that Canadian mutual funds have higher ongoing expense ratios.
Counter: Canada’s load structure is broadly similar to the global average. In many countries, funds with a front-end sales charge are in the minority, and in many countries as well these charges can and are negotiated to lower levels than are stated in the prospectus.
Claim: Canadian mutual funds must pay a value-added tax that pushes up their official expense ratios.
Counter: The source of the costs is immaterial to the fund investor, and do not obviate comparisons. Also, many European mutual funds also carry value-added taxes.
Claim: Canadian mutual funds are required to show greater transparency in expense reporting than are the funds in other countries.
Counter: Canadian expense disclosure is not materially different than the expense disclosure of the 21 other countries in this survey.
A final claim is made that Canadian mutual fund costs should not be compared to those of the United States, because the U.S. marketplace is much larger and therefore enjoys greater economies of scale. This argument has some merit, but it does not explain why Canadian fund expenses are significantly higher than those in other countries with modest population bases, such as Belgium, Australia, Sweden, Norway, and Hong Kong, to name a few.
And it’s not just in the fees category that Canada received poor grades. We also received a D in regulation and taxation because of “steep investment taxes” levied on fund management fees and a high tax bill on investment returns. Morningstar looked at taxes on a standard portfolio (60% equities, 40% fixed income) with an initial value of $100,000 and held over 5 years. The effective taxes on the investment worked out to 26% in Canada, the highest in the list.
Michael James weighed in on the report here and Jon Chevreau’s take is available here.