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A Spotlight on Fees:

Globe&Mail’s Rob Carrick had an excellent article found on globefund this Saturday titled A spotlight on funds that raise fees.

In past posts and in the Mutual Funds category I’ve taken a look at fees and concentrated mainly on how I feel they impact the long-term returns of investors. You won’t get much for free in life, but minimizing the amount you pay for financial performance on your money can contribute to a meaningful return over the longer-term.

Carrick’s article looks at a list of mutual funds that have recently increased their fees (MER since 2003) ranging from as low as 3.6% for the CIBC Money Market fund to 38% for the Scotia Canadian Dividend fund. What’s significant here, in my opinion, is the timing of such a move.

In an environment of increased awareness towards the fees that funds charge their customers for managements’ expenses, increased competition from low-cost index funds and a challenging market environment over the past 8 months in equity markets; these funds are now increasing fees when performance is surely to lag in comparison to their recent 5-year returns? One theory is to make up for losses of redemptions in other funds they hold or increase profits to off-set losses in other segments of their business.

The significance or convenience in this situation is that regardless of what the markets return, managers will nearly always collect their fees and commissions even in the face of negative returns for investors. This might seem unfair, but believe me when I say that this is the industry standard and only one manager that I know of has ever returned fees to investors when their performance has lagged below his/her own expectations.

Carrick’s Interesting Facts:
– 12 of 20 funds on the list have assets under management over $1B or more
– Recent increases are spread across a variety of fund companies
– Investors should be aware of any MER trend (either rising or falling) over the past few years
– Majority of the funds have lagged their respective peers & index for quite some time

* I own positions in BNS, MFC, RY & TD who own/operate some of the mentioned funds in the article.

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{ 4 comments… add one }
  • Mark April 14, 2008, 11:27 am

    And not a single AGF fund on the list!!!

  • ewok April 14, 2008, 12:12 pm

    That’s because your funds are ALREADY the highest in the industry, lol :)…how much higher could you go?

  • Canadian Capitalist April 15, 2008, 2:59 pm

    Thanks for the Rob Carrick article. One more note is that five years back, GST of 7% on the management fee portion would have been borne by investors. Today, as the GST is 5%, even if the MER remains the same as 5 years back, the GST cut has not been passed on to mutual fund investors.

  • Nurse B, 911 April 15, 2008, 9:28 pm

    Very good point CC (and great blog btw!). This is something I’m sure people have missed that the fund companies aren’t in a hurry to acknowledge. Right Mark?

    I feel much better now in my assessment earlier in the year of focusing on active management and purchasing the stock of the companies rather than their funds.

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