Mutual Fund Fee Debate: The Industry Response

Jonathan Chevreau dissects the industry response to a firestorm of criticism over the high fees charged by Canadian mutual funds in today’s edition of The Financial Post ($). The rebuttal by Dan Hallett that Mr. Chevreau refers to is available here.

The original study points out that the average MER charged by a Canadian fund is 1.97%, the total expense ratio (TER) is 2.68% and the “total shareholder charges” (taking into account front-end or back-end loads) is 4.66%. Canadian mutual fund fees are the highest in the developed world in all those data points. Mr. Hallett’s rebuttal mostly concerns with how sales charges were calculated in the study. Even if we ignore the sales charges completely, the average TER of a Canadian fund is 2.68% (still the world champion) compared to 1.42% for the average American fund. Over a period of 25 years, if Canadian and American fund returns were the same before fees (let’s assume it is 10%), an initial investment of $1,000 would grow to $7,800 in an American fund and only $5,800 in the Canadian fund.

Of course, the old argument of the fund industry is that their active management is superior to traditional indices. Mr. Hallett writes:

Moreover, the authors of the draft paper admittedly do not address if Canadian investors get good value for the higher fees they pay. While Canadian MERs are undoubtedly high, a measure of benefits received vs. costs incurred is key to determining whether Canadians are indeed being duped, as has been suggested by some journalists. Yes, we pay more than many other countries, but this draft paper is far from conclusive due to its preliminary nature and the weaknesses identified.

Unfortunately for the industry, Standard & Poors does keep a scorecard of indices versus actively managed funds (the latest is available here). According to this latest report, a mere 14% of Canadian equity funds outperformed the S&P/TSX index and 25% of US equity funds outperformed the S&P 500 index over a five- year period. Seems to me that we are a nation of mutual fund “suckers” paying more and getting less in return.