If mutual fund management expense ratios (MERs) over 3 per cent trigger a panic attack, how do you feel about trading expense ratios (TERs)* adding another percentage point or two to that number?
Are TERs as big of a deal? Sometimes, and sometimes not.
The trading expense ratio gives you an idea of how much trading commissions were incurred to buy and sell investments inside the fund. It's equal to the total commissions incurred divided by the total assets, essentially. So if a fund has $1-billion in assets on average throughout the year, and the total trading commissions inside the fund were $10-million, you would have a TER of 1 per cent.
The TER of a fund is harder to find than the MER, but they are required to be published in a fund's management's report on fund performance document (MRFP). You can normally find this in the "ratios and supplemental data" section.
Now I realize that those with a laser-like focus on fees will point out that if a fund's MER was 2.5 per cent and the TER is 1 per cent, the true cost to the investor is 3.5 per cent and this should be an all-inclusive number. There is some merit to that, but I don't see it as cut and dried.
If you hire a manager to run a large cap, buy and hold mandate for you, then yes, I would agree that more attention to the TER would be warranted. Ditto for an index fund. But if you hired a manager to run a small-cap trading fund, then a higher TER is almost expected. So different mandates have different expecations as to what a "good" TER is.
You also have to take into account the size and age of the fund. A larger fund is going to benefit from scale, so the TER should decrease as assets increase. A new fund is going to have a higher ratio of inflows to the fund versus total assets, so it only makes sense that the TER would be higher. You can't have an average holding period of three years, when the fund is only one year old. So size and time have an effect on TER that are not readily apparent.
Taken together, it would seem to me that TER comparisons are most meaningful when comparing similar mandates, of similar age and size. As any of these three variables differ, the value derived from a simple TER comparison diminishes.
* The acronym TER actually means different things depending on which country you are in. For example, in the United States and the United Kingdom, TER stands for Total Expense Ratio, not Trading Expense Ratio. But the American definition of Total Expense Ratio is different from the British defintion.
Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is wheredoesallmymoneygo.com.
Preet Banerjee