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The Canadian Foundation for Advancement of Investor Rights is keeping a recent Morningstar study on mutual fund fees in the spotlight, and it's hard not to blame them. The Morningstar report was truly damning on Canadian fund fees in particular, ranking them the worst among the 22 countries examined.

Now, overall, Canada didn't score too badly in its letter grade, receiving a C+ that puts it more or less in the middle of the pack - but that's due to investor-friendly disclosure and excellent sales practices. However, investors will probably want to focus on the rather more important area of fees and expenses. Here, the Morningstar report gave the Canadian mutual fund industry an F grade, arguing not only that costs are high but that they "cannot be explained by pointing to unique features of the Canadian fund market."

Needless to say, the grade puts Canada dead last in the rankings, behind the likes of India, Spain and Italy - and that is rather disappointing given that observers have long been arguing that fees are tremendously important to long-term returns. After all, a fund manager might have good and bad years, but fees are constant.

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The authors of the report, Benjamin Alpert and John Rekenthaler, broke this category into three classes of funds: equity funds, fixed income funds and money market funds. Canada looked bad in every one of them. For example, it stood out for offering equity funds with average total expense ratios above 2 per cent. By comparison, U.S. total expense ratios were below 1 per cent, and funds in Australia and New Zealand weren't much more.

"Canada is the only country in the survey with TERs in the highest grouping for each of the three broad categories," the report said. "Investors in the United States pay the lowest TERs for equity funds and below average costs for fixed-income and money market funds."

It concludes: "Among the 22 countries in this survey, Canada has the highest annual expense ratios for equity funds, the third highest for bond funds, and tied for the highest for money-market funds."

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