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Low-MER funds: more for less

Lower costs can boost returns so ROB CARRICK picks some above-average performers with below-average management expense ratios


Pay less, get more.

If you like this concept, there are a handful of mutual funds that you should know about.

The common characteristic of these funds is their low management expense ratio -- a fancy way of saying that they run their operations on a shoestring.

What's so great about a bunch of cheapo mutual funds? The answer can be found in simple arithmetic.

Take any fund and add its MER onto its published return over the previous year. Now you have an idea of how much it really made.

MERs measure the percentage of a fund's assets that go to cover expenses such as research, manager salaries, advertising and commissions to financial advisers. With a low MER, more of a fund's returns go to you as opposed to the fund company. This will be especially important if stock markets keep moving sideways.

Here's a practical example using the Trimark Canadian Fund. It comes in a low-MER version, for which you pay an upfront sales charge to buy in, and a higher-MER version, with a deferred sales charge and no upfront commission.

The front-load option for this fund has an MER of 1.64 per cent and a return for calendar 2001 of 4.52 per cent.

The DSC version has a 2.59-per-cent MER and a return year of 3.52 per cent.

Any questions?

Low-MER funds occasionally pop up in the offerings of big fund familes -- an example would be the Trimark funds from AIM Funds Management Inc. Generally, though, investors seeking low-MER funds would do well to seek out fund families that specialize in low-cost funds.

Phillips Hager & North Investment Management Ltd. is an obvious candidate, as is McLean Budden Ltd. and Saxon Mutual Funds. Don't buy a fund just because it has a low MER, though.

Take the PH&N U.S. Growth Fund. At 1.17 per cent, its MER is well less than half of the average for U.S. equity funds. Unfortunately, its five-year return of 3 per cent is less than half of the average fund's 7 per cent.

A low MER isn't a slam-dunk in pointing the way to good performance. If a fund manager is a dud or in a slump, a low MER won't help much. Likewise, a brilliant or lucky manager won't be slowed down by a higher-than-average MER.

Still, MERs can be of definite use in choosing funds. In fact, a recent study by a U.S. firm called Financial Research Corp. found that, of 18 variables examined, low MERs were the best for their usefulness in selecting funds.

The trouble with low-MER fund companies is that they're victims of their own frugality. They don't generally do glossy magazine ads, and television commercials during registered retirement savings plan season are unheard of.

Some of these companies further ensure their obscurity by not paying any commissions to financial advisers.

All of this explains why we decided to highlight some of the best low-MER funds, which means funds that combine above-average, long-term performance with MERs that are well below average. To narrow the field, we excluded relatively new funds (we aimed for 10-year returns although a few younger firms made the cut), funds that aren't widely available (for instance, available in only one province) and funds with minimum upfront investments of more than $25,000.

Here's a rundown of our picks:
Canadian equity funds

Phillips, Hager & North Canadian Equity Fund: Here's a fund that has quietly managed to be a little bit better than both the average fund in its category and the benchmark Toronto Stock Exchange 300 composite index over the past one-, three-, five- and 10-year periods. What more can you ask?

One thing to bear in mind with this fund is that it takes $25,000 to buy in.
McLean Budden Canadian Equity Growth: A stable and productive fund that focuses on big blue-chips listed on the TSE 300.
Trimark Canadian Fund (front-load version): This 20-year-old fund has faded in and out of favour, but there's no denying that it has been a great long-term investment. Both long- and short-term returns compare very well to other funds, while volatility has been extremely low.
Beutel Goodman Canadian Equity: The long-term numbers are good but this fund has really shone during the market turbulence of the past year or so. It boasts low volatility as well.
Saxon Stock: This is the complete package, with astronomically good returns and strikingly low volatility compared to the TSE 300. Top holdings have recently included such oddities as the iShares MSCI-Japan Fund, an exchange-traded fund that focuses on the Japanese stock market.
U.S. equity funds

McLean Budden American Equity: Combines a strikingly low MER with returns that have consistently outpaced the average U.S. equity fund. Holds many familiar U.S. blue chips, including Pfizer, Microsoft, Gillette and J.P. Morgan Chase & Co.
Mawer U.S. Equity: Calgary-based Mawer Mutual Funds has several good low-MER offerings, including this one. It lacks a 10-year history, but its five-year numbers are impressive.
O'Shaughnessy U.S. Growth; O'Shaughnessy U.S. Value: These two funds have only a three-year track record but they're included because of their impressive results, and their easy availability through Royal Bank branches and any other place selling the Royal Mutual Funds family.
Global equity funds

Trimark Fund (front-load version): Another accomplished 20-year-old from the Trimark department at AIM. Returns for both the short and long terms have been outstanding. As with Trimark Canadian, there's a DSC version of this fund with a much higher MER.
Saxon World Growth: A value fund that parlays holdings in a motley collection of large- and smaller-cap stocks into big returns and low volatility. Will hold defensive investments, such as bonds and preferred shares, if there is a lack of undervalued stocks to buy.
Scudder Global: The 'classic' version of this member of the Mackenzie Financial Corp. family hasn't been great over the past year but its longer-term numbers are quite a bit better than average.
Canadian bond funds

PH&N Bond: With interest rates as low as they are, a low MER is a huge advantage for a bond fund.

This fund's exceptionally low MER has helped it make a tradition of outperforming the average for its category.
TD Canadian Bond: This widely available bank fund has very strong long-term numbers.
Canadian money-market funds

Altamira T-Bill: If low MERs are recommended for bond funds, they're essential for money-market funds.

Altamira T-Bill is a textbook example of how a low MER can mean higher returns for investors.
Altamira Short Term Canadian Income: Great returns so far from this fund (it's approaching its fifth anniversary).
Perigee T-Plus: Another case of investors gaining from a comparatively low MER.
PH&N Money Market: This fund has reliably outperformed the average fund in this category over the past decade.
High performers at a low price
Here are some funds that have combined lower-than-average management expense ratios with higher-than-average returns


Fund name                         MER    3-year  5-year  10-year

Canadian equity funds
Average MER: 2.56%; 10-year average annual return: 10.2%

Beutel Goodman Canadian Equity    1.38%   14.3%   10.0%   10.8%

McLean Budden Cdn. Equity Growth  1.30    12.2    10.1    12.1

PH&N Canadian Equity              1.14    11.8    10.1    12.3

Saxon Stock                       1.75    20.8    13.2    16.9

Trimark Canadian                  1.64    13.2     8.1    11.8

U.S. equity fund
Average MER: 2.56%; 10-year average annual return: 10.6%

Mawer U.S. Equity                 1.39     1.2    10.0*     -.

McLean Budden American Equity     1.30     7.2    16.4    15.3

O'Shaughnessy U.S. Growth         1.85    18.5#     -       -.

O'Shaughnessy U.S. Value          1.85     9.1#     -       -.

Global equity funds
Average MER: 2.80%; 10-year average annual return: 9.3%

Saxon World Growth                1.75    14.0     8.8    13.0

Scudder Global                    1.81     2.8     8.6**     -.

Trimark Fund                      1.61    15.3    13.3    16.4

Canadian bond funds
Average MER: 1.82%; 10-year average annual return: 7.3%

PH&N Bond                         0.58     5.1     6.8     8.8

TD Canadian Bond                  1.02     5.1     7.1     8.9

Canadian money-markets funds
Average MER: 1.07%; 10-year average annual return: 4.2%

Altamira Short Term Cdn. Income   0.59     5.1##    -       -.

Altamira T-Bill                   0.39     4.4##    -       -.

Perigee T-Plus                    0.48     4.6     4.4     5.6

PH&N Cdn. Money Market            0.48     4.3     4.2     4.7

-*Average 5-year U.S. equity fund return: 8.4%; #average 3-year U.S. equity fund return: -2.5%; **average 5-year global equity fund return: 6%; ##average 3-year Canadian moneymarket fund return: 3.8%.

© 2007 The Globe and Mail. All rights reserved.

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