Last Saturday (April 5th), Globe and Mail columnist Rob Carrick wrote a piece (Fund Fees that Have Fallen the Most) featuring mutual funds where the management expense ratio is falling.   He published a list of the ‘Top 30 MER decliners’ (click on the link at the end of his article), which showed the biggest percentage reductions over the last five years for funds with assets over $500 million.

The piece was written in the context that “fund fees are falling.”  Rob points out that “every time it lowers fees, a fund company makes it products more attractive.”

I wanted to add some more analysis to the table as well as some general comments on this industry trend.

• First, while mutual fund fees are edging down, it does not mean investors are paying less than they did in 2003.  Overall, I would suggest that Canadians are paying more due to the fact that structured products and wrap funds are now a much bigger part of the market.  While it isn’t always clear what the fees are on these products, our research suggests that there is a very tight relationship between packaging and fees – more packaging = higher fees.  For the overall wealth management industry, I would suggest that the ‘revenue per dollar of assets’ is higher than it was five years ago.
• On Rob’s list, 6 of the 30 are money market and other types of fixed income funds that had ridiculously high fees in 2003 – one high yield fund had an MER of 2.84%.  The reductions, while large in percentage terms, still don’t get these funds into a reasonable range given that Government of Canada bonds yield 3.5%.
• The foreign equity funds (which account for half of the list) moved down from having ‘ridiculous’ fees - many over 3% and one over 4% - into the ‘expensive’ category.  There were a few of exceptions, which I’ll discuss below.
• Balanced funds have typically been one of the most over-priced fund categories.  The table confirms this.  These funds are too often priced as if they are equity funds, even though they have a high proportion of fixed income securities in them.  If you assign a lower management fee to cash and bonds, the math shows that the unitholders are paying well over 3% for equity management, sometimes over 4%.  (Note: In doing this calculation, I don’t impute any value for asset allocation because the mix of these funds rarely changes very much).  These comments on balanced funds also apply to wrap funds and other types of packaged products that are built around a balanced or income-oriented fund.
• Finally, some good news.  There are a number of exceptions to my above comments and they almost all belong to RBC funds.  The Royal Bank has been the most proactive company in bringing fees down and their funds are reasonably priced in general.  In addition, they have introduced B-series funds which are available through their discount broker (RBC Direct Investing) that are at the bottom of industry ranges.

Rob’s article gave me an excuse to write about something I’ve been observing for a while.  There is minor progress being made on mutual fund fees, with RBC being the leader, but the overall fees being paid by individual investors have increased in recent years due to more packaging and needless capital guarantees.