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Susan Hollis sent us this shot of what she described as a rare Northern Pygmy Owl in the boughs of an evergreen along the shores of the Nexen Lands in Squamish, B.C. Another reader e-mailed to say it's a Saw-whet Owl. (Susan Hollis)

Portfolio Strategy

Wise investors keep a close eye on their fund costs Add to ...

It's price-check time for your mutual funds.

The semi-annual reports that fund companies are required to send clients have recently been issued by many firms, and they're full of information on the cost of owning funds. Think you know what your funds cost? After looking at dozens of reports, I'd bet you don't.

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Did you know, for example, that the cost of owning some funds has moved higher in some cases, despite weak returns? Or that the market volatility of the past few years has caused some funds to do more trading than usual, making them more expensive to own?

The information is all there in the semi-annual management report of fund performance, which is either mailed to you or made available online (look to the fund company websites or sedar.com). Two words of advice about these reports: Read them. Savvy investors always know the cost of owning their funds.

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The $2.4-billion Scotia Canadian Balanced Fund is an example of a fund where lacklustre returns in recent years call for a price check. Look this fund up on Globefund.com and you'll find that results are below the average in the Canadian neutral balanced category for all periods of one year or longer (it has done well more recently).

In the Ratios and Supplemental Data section of this fund's management report, you'll find that the management expense ratio, or MER, for the widely available Class A version was 1.96 per cent. That's up incrementally from 1.95 per cent in 2008, but less than the 2 per cent charged in 2007.

A year-over-year MER increase of a one-hundredth of a percentage point - financial people call that a basis point, or a "beep" - is not an issue. Funds of all types plunged in value in 2008, which means they had a smaller base against which to charge their expenses. In this context, an increase in the MER of a basis point is understandable.

But that's not the end of the fee story with this fund. There's also the trading expense ratio, or TER, to consider.

Let's backtrack for a moment to look at the costs of owning a fund. With the MER, fees associated with paying managers and covering operational costs are expressed as a percentage of the assets in a fund. The TER reflects the one major expense not included in the MER - brokerage trading commissions - as a percentage of assets.

Add the MER and the TER and you have the true cost of owning a fund. And, to answer a question this column has often been asked over the years, fund returns are virtually always published on an after-fee basis.

The TER for Scotia Canadian Balanced was 0.34 per cent last year, which compares to 0.14 per cent in 2008 and a five-year average of 0.13 per cent. Clearly, the volatile market conditions of the past couple of years have prompted the managers to make more changes than usual in the portfolio.

Bottom line, the total cost of owning this fund last year was 2.3 per cent, up from 2.09 per cent. Whether that's a fair price is for unitholders to decide.

With struggling mutual funds, a price check can help in your decision of whether to hang on or sell and find something else. Let's take a look at Sprott Canadian Equity, where the TER rose to 0.88 per cent from 0.6 per cent in 2008 and 0.21 per cent in 2007.



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This fund has underperformed its peers in the natural resources equity category in the past few years, although its 10-year average annual return is still outstanding at 19.1 per cent. Sprott Canadian Equity's long-term record of success suggests potential for a strong rebound at some point, but in the meantime unitholders paid a stiff combined MER and TER of 3.78 per cent last year while receiving a net return of just under 36 per cent. The category average: 61.2 per cent.

For people who own the AIC Value Fund, a long-time laggard showing signs of revival, there's both good and bad news in the management report of fund performance. The fund had a higher than normal TER last year, but some of the costs are being absorbed by the new management that took over last October.

Unfortunately, you can't put a good spin on the AIC Value's MER touching a five-year high of 2.62 per cent last year. In fact, the MER has been rising steadily from 2.44 per cent in 2005.

It's especially important to do a price check on underperforming funds with no sign of a turnaround like, say, Brandes Global Equity. This fund is run by a respected blue-chip value investing outfit called Brandes Investment Partners, but it's solidly below average in the global equity category over the past five years.

There's some positive news for unitholders of this fund in the latest semi-annual management report, however. The TER hit a five-year low last year of 0.06 per cent last year, which suggests that management is confident about the stocks it owns and sees no reason to make massive changes. If you believe in the Brandes brand of value investing, then that's a reason to hang onto this fund.

Another reason is that while the 2.57-per-cent MER for 2009 isn't a notable bargain, it does represent a savings from the 2.7-per-cent level in 2006. Part of the reason is that Brandes is eating some expenses to keep fees down. Without this, the MER would be 2.67 per cent.

Some of the least dramatic fee changes in the past year can be found among the country's most popular funds. RBC Canadian Dividend fell 27 per cent in 2008, but the fund's MER edged down from 1.71 per cent to 1.70 per cent, where it remained at the end of 2009. The TER has been somewhat higher than usual the past two years, but the total cost of ownership in 2009 was quite competitive at 1.87 per cent.

Reading the management report of fund performance can sometimes make you feel validated in your choice of investment.

Take Fidelity Canadian Asset Allocation - its TER fell to 0.06 per cent from 0.1 per cent for the 12 months to Nov. 30, while the MER edged lower to 2.16 per cent from 2.18 per cent. With its consistently above-average returns and declining fees, unitholders have to be happy with the value they're getting here.



Looking For Value





















A look at how the cost of owning several of the country's biggest mutual funds has changed over the past three years. The measures used here are management expense ratios and trading expense ratios. Add the MER and the TER to get your total cost of owning a fund. Note: published fund returns are net of fees.









Fund

Assets ($ billions)

TER (%) 2007

2008

2009

MER (%) 2007

2008

2009

3-yr Quartile

Investors Dividend A

13.2

0.01

0.02

0.01

2.69

2.66

2.67

3

RBC Canadian Dividend

10.8

0.05

0.18

0.17

1.71

1.7

1.7

1

CI Harbour Growth & Income

9

0.02

0.05

0.03

2.34

2.33

2.31

2

RBC Balanced

8.2

0.1

0.12

0.2

2.27

2.25

2.25

4

RBC Monthly Income

7.2

0.05

0.06

0.07

1.15

1.14

1.15

1

CIBC Monthly Income

6.4

0.01

0.09

0.15

1.41

1.42

1.41

2

CI Harbour

6.1

0.02

0.05

0.04

2.34

2.34

2.31

1

Mackenzie Cundill Value C

5

0.08

0.08

0.09

2.41

2.39

2.43

1

BMO Monthly Income

4.9

0.03

0.04

0.03

1.48

1.49

1.49

1

RBC Canadian Equity

4.8

0.1

0.16

0.21

1.97

1.96

1.97

2

Fidelity Cdn Asset Allocation B

4.7

0

0.01

0.06

2.41

2.18

2.16

1

TD Monthly Income

4.4

0.01

0

0

1.41

1.4

1.4

1

BMO Dividend

4.2

0.04

0.07

0.08

1.71

1.71

1.7

3

Notes:

  • fund company fiscal year ends differ - the most recent data is used here
  • quartiles divide funds in a category into four groups - 1st quartile is best


Source: fund company management reports, Globeinvestor.com

Follow on Twitter: @rcarrick

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