Wanted: Frugal, industrious mutual funds for long-term relationship. No fee-hogs need apply.
Many of the largest funds in the country are ready and able to fill this job description. If you want solid value for the mutual fund management fees you pay, these behemoths deliver.
The mutual fund industry has deservedly been criticized for being too greedy with the fees it charges investors. But let's forget about that for a moment and look only at the bang that unitholders of the country's largest funds have received for the bucks they paid in fund fees.
One way to do this would be to look at how much of a fund's returns over the past five years were soaked up by the fees charged to investors to cover operating expenses and pay dealers and advisers.
We'll call this measure the Fund Fee Value Indicator (FFVI). Here's how it works: Just take a fund's five-year compound average annual return and add it to the management expense ratio, which expresses the fees charged by a fund as a percentage of assets.
Now you've got the fund's gross return, or what it made before fees were applied. Your final step is to divide this gross return into the MER, then multiply by 100.
By this measure, the best fund value in Canada could well be the $1.7-billion Phillips Hager & North Divided Income Fund.
This fund netted 15.7 per cent over the five years to Aug. 31, with a five-year average MER of just 1.18 per cent. Apply the Fund Fee Value Indicator and you'll find that the MER consumed only 7 per cent of the fund's gross return. That's brilliant.
For context, take a look at the $6.6-billion Templeton Growth Fund, where the five-year average MER of 2.25 per cent ate up pretty darn close to half of the fund's five-year gross return of 2.4 per cent. Or, consider the $1.9-billion AIC Advantage Fund, where the MER swallowed 72 per cent of the fund's gross returns.
All of these funds are found on the list of the largest 50 funds in Canada, as measured by assets. This is a good place to apply the Fund Fee Value Indicator because these funds combined hold about $150-billion, or a little more than $1 of every $3 invested in funds in this country.
Two fund groups come off looking especially good in this exercise: the Trimark half of AIM Trimark, and PH&N.
There are six Trimark funds among the Top 50 and three of them had FFVI scores of 15 or less, which means their MERs ate up less than 15 per cent of gross returns over the past five years. Over all, just 16 of the biggest 50 funds struck this fine balance of results and frugality. A quintessential high-value fund is the $3.7-billion Trimark Fund (front-load version), which delivered a compound average annual 9.75 per cent for the five years to Aug. 31. The five-year average MER was 1.62 per cent, and the FFVI was 14.
Talk about doing more with less. The average five-year return from comparable global funds over the past five years was 0.7 per cent, while the current average MER for the category is 2.91 per cent.
The other high-value funds from the AIM Trimark family were Trimark Canadian and Trimark Income Growth. Both have the twin attributes of lower-than-average MERs and higher-than-average returns.
Funds in the AIM Trimark family have the advantage of easy availability and a minimum up-front investment of just $500. PH&N requires $25,000 to buy in, and its funds are less widely sold because they don't pay commissions to dealers and advisers (some may sell PH&N funds if you agree to pay an up-front sales fee).
Still, PH&N deserves attention for the combination of outsized returns and minuscule fees associated with the three funds it placed on the Top 50 list.
The $2.1-billion PH&N Bond Fund is almost as outstanding a value as its dividend fund sibling, thanks to an MER that ate up just 8 per cent of gross returns.
PH&N Balanced Pension Trust isn't available to retail investors (it's sold only to institutional and group retirement plans), but it's still worth noting because its outstanding FFVI score of 9.
Bank funds are prominent on the Top 50 list, and they are among the funds that have made the most of the fees paid by unitholders.
Consider the TD Canadian Bond Fund, the largest Canadian bond fund by far, with assets of about $3.3-billion. Its MER of 1.02 per cent is 0.82 of a percentage point below the average, while its five-year return of 7.2 per cent is 1.8 points above the average. Add it all up and you get a sterling FFVI score of 12, which is to say that this fund's MER used up just 12 per cent of its returns.
The $1.7-billion RBC Monthly Income Fund delivered 8.83 per cent a year to investors over the past five years, way above average in the category of Canadian balanced funds. Its current MER of 1.25 per cent is vastly lower than average. Put it all together and you're left with another laudable FFVI score of 12.
Yet another bank fund to rate an FFVI of 12 was the $1.7-billion BMO Dividend Fund, while RBC Dividend scored a 14.
The worst FFVI showings among the Top 50 funds by assets were those that lost money in the past five years - the $3.1-billion Templeton International Stock Fund, the $3.8-billion Fidelity International Portfolio and the $1.6-billion CI Global Fund.
In the case of the Fidelity and CI funds, fees obliterated the minuscule gross returns the funds posted. Fidelity International Portfolio grossed 1.88 per cent annually over the past five years, but investors were left with a loss of 0.75 per cent after the 2.63-per-cent MER was applied.
With its five-year loss of 2.98 per cent, Templeton International Stock would have been in the red even without the influence of its 2.7-per-cent average five-year MER.
Among the mediocre showings on the Top 50 list were RBC Balanced, where fees added up to just over one-third of the fund's gross five-year returns, and MD Growth, where the FFVI was a hefty 40.
Care to try the FFVI on your own funds, or funds that you're researching? Five-year performance numbers are available on Globefund.com at http://www.globefund.com, while MERs for the past five years can be found in a fund company's simplified prospectus. You can download these documents for free on the Sedar Web site at http://www.sedar.com.
Interpreting the FFVI requires some judgment. Templeton International Stock and Fidelity International Portfolio funds were off-the-scale bad, but they have good long-term returns and blue-chip companies behind them. Some might say their current woes represent a buying opportunity.
Likewise, some funds with impressive FFVI scores may not be able to sustain them. Take CI Signature Select Canadian, with its fine FFVI rating of 14.
The story here is an amazing five-year return of 16.5 per cent, which is more than double the average Canadian equity fund. This level of outperformance is difficult to repeat year after year.
And then there are the instances, say with funds like PH&N Bond, the Trimark Fund and TD Canadian Bond, where the FFVI delivers a clear message.
Found: Frugal, industrious mutual funds for long-term relationship.
Fund fee indicator
The best and worst scores, by fund class, among Canada's 50 largest funds, based on the percentage of gross returns that went to pay costs associated with running the fund.
% of gross 5-yr 5 yr avg Gross return needed Fund return* MER return to pay expenses
Trimark Canadian 9.75 1.63 11.38 14
PH&N Dividend Income 15.72 1.18 16.90 7
RBC Monthly Income 8.83 1.25 10.08 12
Canadian Money Market
TD Premium Money Market 4.06 0.32 4.38 7
PH&N Bond 7.01 0.58 7.59 8
Trimark Fund 9.75 1.62 11.37 14
AIC Advantage II 0.61 2.68 3.28 81
RBC Balanced 4.55 2.35 6.90 34
Canadian Money Market
CIBC Money Market 3.27 1.10 4.37 25
Investors Government Bond 5.20 2.01 7.21 28
Templeton Int'l Stock -2.98 2.70 -0.28 100
- * compound average annual return
SOURCE: GLOBEFUND.COM, FUND COMPANY PROSPECTUSES
© 2007 The Globe and Mail. All rights reserved.
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