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More givers needed in the world of mutual funds

The mutual fund world has its givers and its takers.

Givers are fund companies that have controlled costs and fees in such a way that they're consuming less of the returns generated by their products than they did a few years ago. RBC Funds, the Trimark branch of AIM Funds Management Inc. and Investors Group Inc. would be examples.

The takers are fund companies that are helping themselves to a bigger slice of the pie than ever. Several big players are part of this group, although no one name stands out.

The giver and taker characterizations emerge from an analysis of the 50 largest funds by assets over the past four years. With a total of almost $170-billion in assets, they account for more than one-third of all the money Canadians have invested in mutual funds.

The purpose of the analysis was to answer the question of which direction mutual fund fees have moved over a period in which the industry has grown by about 9 per cent.

Given this increase in assets, the concept of economies of scale would suggest some opportunities for cost cutting.

Guess which group dominated in the analysis -- givers or takers?

Right, takers. A total of 28 of the largest funds have a higher management expense ratio than they did four years ago, while 18 funds are lower and four funds are unchanged.

In dollar terms, there's about $90-billion invested in funds charging more and almost $57-billion in funds charging less.

Each of the four Trimark funds on the list had a lower MER. An example: Trimark Select Growth had an MER of 2.51 per cent in 2000, which is to say that the costs of running and selling the fund soaked up 2.51 percentage points of the fund's gross return. Today, the MER on this fund is 2.39 per cent, a bargain in that the average peer fund in the global equity category charges 2.98 per cent.

At RBC, six of the eight RBC funds on the Top 50 list were lower, one was incrementally higher and one was unchanged. Among the funds with lower MERs is RBC Dividend, which reduced its MER by 0.1 of a point to 1.79 per cent.

All but two of the eight Investors Group funds on the list chopped about 0.2 of a point off their MERs, although they're still on the high side for their categories.

Among the funds that took from unitholders by increasing their MERs, Templeton Growth Fund stands out.

It had a management expense ratio of 2 per cent four years ago, which means the costs of running the fund chopped two percentage points off the its gross returns that year.

Today, Templeton Growth has an MER of 2.37 per cent, an increase of 18 per cent. A sister fund, Templeton International Stock, has increased its MER by the same magnitude.

Other funds charging more include:

CIBC Money Market: This fund's MER rose to 1.15 per cent from 1.02 per cent, a hefty increase in a fund category where the link between low MERs and superior returns is the strongest.

CI Harbour: A quality Canadian equity fund that has raised its MER to 2.49 per cent from 2.32 per cent four years ago.

AGF Canadian Stock: Another good performer that dug deeper into the returns of its unitholders, in this case by increasing the MER to 2.49 per cent from 2.33 per cent.

Several other funds experienced nominal MER increases of less than 0.06 of a point, including a few from Mackenzie Financial and Phillips Hager & North, the latter a company with some of the lowest fees in the business.

Raising the MER of a fund can be either an offensive or defensive move. Cranking up the MER on a fund with increasing assets is certainly offensive, and it's also a kind of double-dipping. Keeping an MER level would still generate extra revenue if a fund's assets were rising; with a higher MER and a bigger asset base, the revenues are all the larger.

What's happened with the MER of Templeton Growth can be described as a defensive move.

The fund's assets have declined by about $4-billion over the past four years, which means the MER had to be raised to keep pace with costs. As it is, the fund generates less revenue with its higher MER and smaller asset base.

Curiously, a fund can still generate higher revenues even if its MER is trimmed. All it takes is a steadily rising asset base against which to collect fees.

You might say, then, that the ideal fund is one that does well for its unitholders and attracts enough new money that its MER can be rolled back while still generating more revenue.

This is a true symbiosis of giving and taking between investors and their fund companies and it's rare. rcarrick@globeandmail.ca

Mutual fund fees

Comparison of management expense ratios

.......................Rising MER....Falling MER......Level MER

........................Templeton...Trimark Select...Fidelity Canadian

.......................Growth Fund...Growth Fund...Asset Allocation

Current Assets.......$6.75-billion....$6.13-billion.....$6.11-billion

MER......................2.37%...........2.39%...........2.51%

Third quarter 2000

Assets................$10.76-billion....$5.34-billion.....$7.18-billion

MER......................2%...............2.51%...........2.51%

SOURCE: GLOBEINVESTOR

© 2007 The Globe and Mail. All rights reserved.

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