A recent study that suggests management fees on Canadian mutual funds have risen sharply over the past eight years is "highly misleading," the Investment Funds Institute of Canada said yesterday.
Tom Hockin, president of the fund industry group, said the study by Morningstar Research Inc. compared "apples to oranges" when it tried to track management expense ratios (MERs) from 1995 to 2003.
That's not fair, Mr. Hockin said, because "the new numbers have all sorts of new things in them" including data from segregated funds offered by insurance companies, and so-called "wrap" fund accounts. "The numbers are highly misleading," he said.
Morningstar reported on Tuesday that MERs have grown sharply since 1995, rising to an average of 2.62 per cent from 2.02 per cent over that eight-year period.
Another problem with the numbers, Mr. Hockin said, is that MERs now include about 17 basis points of goods and services tax and another three basis points for higher regulatory costs, and this hasn't been taken into account. (A basis point is 1/100th of a percentage point.)
In fact, he said, IFIC believes MERs have actually come down for medium-sized and large mutual funds.
The author of the Morningstar report, Mark Warywoda, defended his work yesterday, saying that it does take into account the differences in segregated funds, which he acknowledged have higher costs because they have an insurance component.
"We excluded seg funds for part of our analysis," he said, because of the comparison problems. "And for that sample of funds, the trend is clearly upwards. The average MER has gone up from just over 2 per cent in 1998 to over 2.4 per cent for 2002-2003."
While GST is a factor, it can't account for that much change, he said.
In his report, Mr. Warywoda also said that the newer specialized or sector funds that have proliferated typically cost more to run than traditional funds.
But it concludes that investors do not appear to be getting the benefits of economies of scale because many of the highest MERs are at the largest funds.
That conclusion was disputed by John Wiltshire, senior vice-president of Investors Group Inc., whose firm was cited in the Morningstar report as having the highest average MER among the 10 largest mutual fund companies in Canada.
"In general, our fees have come down in the past few years," Mr. Wiltshire said. "As the funds get larger, the fees get lower."
He said Investors Group's own calculation of its average MER is 2.55 per cent, much lower than the 2.97 per cent cited in the Morningstar report. "The numbers don't match at all," he said.
Kimberly Flood, a spokeswoman for Fidelity Investments Canada Ltd., also questioned the report, describing Morningstar's methodology as "a bit whacky."
She said Fidelity has reduced its fees on all but one of the 17 funds that were in existence in 1995 and are still in place in a similar form. Only one -- an emerging markets fund -- has a higher expense ratio now.
Some funds have sharply lower MERs, she said. For example, Fidelity's Canadian Asset Allocation fund now has an MER of 2.49 per cent, compared with 3.35 per cent in 1995.
She added that it is very hard to make comparisons on a company-wide basis with the situation eight years ago, because "we have a much bigger lineup [of funds] than we had in 1995."
Some fund managers said yesterday that fees do not seem to be an issue among investors, even though there has been a lot written about the subject in the media lately.
"We actually do not hear a lot about it at all," said Don Reed, chief executive of Franklin Templeton Investment. "At the end of the day, what an investor tends to do is look at the [final] return."
One reason for this, he said, is that investors don't actually receive any kind of separate bill for expenses that they have to pay -- the management fees are automatically deducted from their fund value.
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