TORONTO and OTTAWA — Canadians have invested billions of dollars in mutual funds that charge fees that eat up much or all of their returns, an exclusive Report on Business analysis shows.
The ROB review of many of Canada's most popular mutual funds shows that management expenses -- the built-in fees that are automatically deducted from the price of each mutual fund unit before the value is published -- can often obliterate most of a fund's returns.
The review found that at least $32.7-billion is invested in funds in Canada that lost money for investors over the five years to March 31, even though the fund companies made tens of millions of dollars in revenue from the fees. Another $21-billion-plus is invested in funds where more than half of the gross returns of the fund went to pay fees, the ROB analysis shows.
The bottom line? The ROB review shows that, in too many cases, investors are not getting good value for the fees they are paying.
"What's interesting to me is that in most products, the more you pay, the more you get," says Brian Tang, president of Vancouver-based Fundamental Research Corp., who did his own study last year on management expense ratios (MERs) of Canadian equity funds. "With these funds, it appears that is not the case."
The Globe's review looked at 615 mutual funds in the major equity, bond and balanced categories to determine the value investors receive for the fees they pay their fund companies. (See chart.) The measuring was done using the Fee-to-Performance Value Indicator, which looks at how much of a fund's gross returns are used by a fund company to cover costs ranging from manager salaries and research to commissions for dealers and advisers who sell funds. The data, prepared by Globefund.com, looked at fund returns for the five years to March 31.
The value indicator uncovered a mix of terrific fund values, mediocrities and outright disasters.
The worst of the worst were the 152 funds in the review that lost money in the past five years, including the $1.1-billion AGF American Growth Class, the $547-million BMO International Equity Fund and the $612-million PH&N U.S. Equity Fund. It's not possible to calculate a negative value score, but these funds can accurately be described as delivering no value at all for their fees.
One fund that offered poor value based on an actual score was the $289-million Investors Canadian Enterprise Fund. Its value score of 88.6 means that fees chewed up almost $9 of every $10 it earned over the past five years.
This fund's value score uses an MER of 2.95 per cent, although Investors Group created a new version of this fund a year ago with a lower MER of 2.75 per cent. Even at that level, the fund's MER is near the higher end for its category.
Other funds that generated more in fees than they did in returns were Ethical Growth, a $463-million socially responsible mutual fund with a value score of 62.7, and the $843-million Altamira Equity Fund, a former fund industry superstar with a score of 55.6.
The median value score for all funds in all categories measured was 25, meaning about 25 per cent of returns went to cover fees. Among the funds easily beating the median -- most of them notable for their low MERs -- was the $2.2-billion PH&N Dividend Income Fund, offered by Vancouver-based fund company Phillips Hager & North. With an MER that is less than half the average of its peers, this fund managed a value score of 7.4.
Not all the top values were low MER funds, however. The $365-million Sprott Canadian Equity Fund has an MER about a full point higher than the typical big fund in this category, yet it managed a value score of 7.4 based on outstanding five-year returns.
The ROB study also assigned scores to fund companies based on their funds used in the study. (See chart.)
AIC Ltd., Investors Group and AGF Funds fared worst, with PH&N, Franklin Templeton Investments and BMO Investments faring best.
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