TORONTO and OTTAWA -- The task: conduct an investigation into the value that investors receive for the fees they pay their mutual fund companies.
The tool: the fee-to-performance value indicator, a gauge of how much of a fund's returns are soaked up by the fund company to cover its costs.
To understand how the value indicator works, you first need to know how the fund industry pays itself from the funds its customers hold. Imagine you own the Acme Canadian Equity Fund and it reports a return of 8 per cent one year. That's the gain for unitholders, but it's not what the fund actually earned.
Many investors don't realize that fund companies reduce their returns by a specified amount every year to cover the costs of running the fund and, in many cases, paying the dealer or adviser who sold the fund. These fees are bundled together and measured as a percentage of the fund's assets. The resulting percentage is called the management expense ratio, or MER.
Let's say Acme Canadian Equity has an average MER of 2.4 per cent -- is this a good value? The fund fee value indicator can help provide an answer.
Applying this measure is easy and you can do it yourself using information on Globefund.com. To start, add the MER to the reported return to arrive at a fund's estimated gross return. Then, divide that number into the MER and multiply by 100.
If we add Acme Canadian Equity's 2.4 per cent MER to its reported return of 8 per cent, we get a gross return of 10.4 per cent. Dividing this number into the MER and then multiplying by 100 yields a value indicator of 23. This can be considered a good value, given that the average Canadian equity fund in our investigation had a comparable score of 26.8. For more information on comparable value indicator scores, check the accompanying charts.
A total of 615 funds were included in this analysis, which was conducted with the help of Globefund.com analyst Tilly Cheung. All the funds had five-year track records in the Canadian equity, Canadian equity (pure), Canadian dividend, Canadian balanced, Canadian tactical asset allocation, Canadian bond, Canadian income trust, global equity, international equity and U.S. equity categories, as of March 31.
Segregated funds were excluded, as were funds that are strictly for high-net-worth investors. Also omitted were versions of funds on our list that were denominated in U.S. dollars or considered domestic content for registered retirement plans, even though they hold foreign securities.
All funds with negative returns for that period were also separated, because it's impossible to have a negative value indicator. Suffice it to say that these funds offered no value at all for their MERs.
To calculate averages for different fund companies, ROB added together all the funds for each company that were included in the study and averaged their value indicator scores. Again, funds with negative five-year returns had to be excluded.
The averages by company were not weighted by the assets in each fund, which means larger and smaller funds got the same weightings when calculating a company's value indicator. However, funds with less than $10-million in assets were not used in the company's total score.
Note that global and international equity funds are omitted from the charts displaying the company value ratings and the best and worst funds. These fund categories have performed poorly enough over the past five years that many top players had extremely low value scores. Indeed, many global funds had negative returns over the past five years and couldn't be included in the value calculation. Including only global funds with weak positive returns in the best/worst chart would have unfairly singled out comparatively good funds, while including them in the company value ratings would have artificially dragged down the results of some firms.
© 2007 The Globe and Mail. All rights reserved.
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