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Mutual Fund News

Who are the low-cost leaders?

ROB CARRICK uncovers some low-fee gems in the product lineups of large mutual fund firms

It has long been a general rule that the biggest of the big mutual fund companies are as relevant to cost-conscious investors as fast-food restaurants are to healthy eaters.

Then came the news this week that Fidelity Investments will lower the management expense ratios of its equity and balanced funds by 0.2 of a percentage point and its bond and money market funds by 0.3 of a point.

Those are decent-sized cuts, but where do they situate Fidelity among its competitors in the fund industry? We took a look and found a couple of interesting things. First, Fidelity will be quite competitive, but not the low-cost leader when the cuts take effect. Second, we found a small number of low-fee gems in the product lineups of other big fund companies.

None of these companies, Fidelity included, poses any serious competition to no-load companies such as Phillips Hager & North, Saxon, McLean Budden, Beutel Goodman and Mawer. These firms have much cheaper MERs than the big guys, but they don't register with most investment advisers because they pay little or nothing in the way of commissions (that's why their fees are so low).

Fidelity's true rivals are the big fund companies that hold most of the $473-billion that Canadians have invested in funds. Low-cost funds exist in this group, but you won't find their names lit up in neon because of the delicacy with which the whole fee issue is treated by these firms. They can't very well promote one fund for being low cost because then investors might wake up to the fact that other funds are quite the opposite.

If you want bargains from the big fund companies, you have to dig for them. Before we do that, let's review the fundamental point that fees have a direct impact on your investment returns.

Fund returns reported to investors reflect gross returns minus the cost of management and administration. The lower these costs, the more there is left over to pile up in the funds that provide a foundation for so many retirement, education and investment accounts. The usual fee measure is the management expense ratio, which is virtually all fund costs except brokerage fees expressed as a percentage of assets.

Among Fidelity's peer fund companies that are widely available to investors, the Trimark line of funds from AIM Funds Management is probably the low-MER leader. After that, you're down to a small group of individual funds that are sparsely distributed throughout the landscape. Let's take a quick tour.

Canadian equity funds

A real curiosity in this category is AGF Canadian Large Cap Dividend, a perfectly sound choice for someone who wants exposure to blue-chip Canada. AGF is a higher-fee company, but this particular fund appears a bargain when you compare its 1.92-per-cent MER to other Canadian equity funds. If you consider the largest 25 of these funds as measured by assets, the average MER would be about 2.5 per cent.

Two Trimark Funds also stand out in this category, the first being Trimark Canadian Endeavour. In a recent Smart Money rating of the largest Canadian equity funds, this entry was chosen the winner on the basis of consistently good returns, preservation of capital and low fees. The MER for Trimark Canadian Endeavour is 2.14 per cent.

Trimark Canadian is another low-fee stalwart, but just the service charge (SC) version. You can only buy this fund with an upfront sales charge, which a small number of so-called "zero load" advisers will waive. What you'll get is a fund that has had its ups and downs over more than 20 years, but also demonstrated the ability to provide better-than-average returns over the long term. The fund's edge is its MER of just 1.64 per cent.

One last low-fee Canadian fund worth noting is RBC O'Shaughnessy Canadian Equity, with an MER of 1.63 per cent. RBC is a no-load fund family, but its products can be sold by advisers in Royal Bank branches. Using a process of screening stocks for various growth-and value-oriented criteria, this fund has been dominant in the Canadian equity category for four straight years.

Here's where Fidelity fits in. Its biggest Canadian equity fund, Fidelity True North, will see its MER fall to 2.35 per cent from 2.55 per cent when the MER reductions take effect on Jan. 10. That's cheaper than all but two of the 10 largest Canadian equity funds by assets from widely available families.

Global equity funds

There's just one low-MER gem to mention here -- the SC version of the Trimark Fund, with an amazingly low MER of 1.62 per cent. This fund lost star manager Bill Kanko in May and returns over the past year have been weak, yet the average annual return for the past 20 years is a superb 12.7 per cent.

Fidelity's big global equity fund is Fidelity International Portfolio, which has been disappointing for a few years now. The MER of 2.64 per cent will fall to 2.44 per cent, which puts it mid-pack among the 10 largest global equity funds.

Canadian balanced funds

Again, Trimark rules. The SC version of Trimark Income Growth has an MER of 1.64 per cent, compared with between 2.2 per cent and 2.52 per cent for comparable big company balanced funds. Trimark Income Growth has beaten the competition senseless over every commonly measured time frame.

A couple of bank funds are also worth mention, even though they're not classic balanced funds and will soon be shifted to a new category called Canadian income balanced. RBC Monthly Income has an MER of 1.21 per cent, while CIBC Monthly Income is at 1.4 per cent. Fidelity Canadian Balanced, a very solid performer, will be quite competitive with the competition when its MER falls to 2.16 per cent from 2.36 per cent.

Canadian bond funds

There are three funds from big companies to consider in this category, one of them from the Trimark family. Trimark Canadian Bond has an MER of 1.28 per cent, which compares with a range of 1.74 per cent to 2 per cent for bond funds from competing families like CI, AGF and Investors Group. Over the past five years, there's not a period where Trimark Canadian Bond hasn't beat the average return in its category.

Bissett Bond from the Franklin Templeton family is another low-fee contender thanks to an MER of 1.44 per cent, but a better choice is TD Canadian Bond, at 1.07 per cent. With its consistently good performance, this latter fund makes as good a case as you'll find for buying a bond fund rather actual bonds. TD Asset Management is like RBC in that advisers can sell its no-load funds. The MER on Fidelity Canadian Bond will fall to 1.34 per cent from 1.66 per cent, which makes the fund very competitive on a cost basis. Performance has been middling, though.

Costs aren't everything when choosing funds, but if nothing else they're a useful way to distinguish between funds on a short list of contenders for your business. On that basis, Fidelity has made its products more appealing. Now, the question is whether other big fund companies will follow.

How MERs measure up

Mutual fund investors who weren't aware of the importance of low management expense ratios (MERs) woke up to the issue this week when Fidelity Investments Canada slashed its fees across the board. But a survey using shows many of the larger, more popular funds available to Canadians already offer top performance with low expenses. Here are several available to investors from the major asset classes.

Ranking funds in increasing order of management-expense ratios (MER). Annual returns to October 29.


Fund Name Net assets MER 1 yr. Rtrn. 3 yr. Rtrn. 5 yr. Rtrn.
1RBC O' Shaughnessy Canadian Equity$856.9-million1.63016.3%14.9%14.2%
2Trimark Canadian -SC $1.5-billion1.63710.5% 7.9% 6.8%
3AGF Canadian Large Cap Dividend $2.4-billion1.92116.9% 8.9% 6.2%
4Trimark Canadian Endeavour $1.6-billion2.1416.9%12.5%10.6%
SECTOR AVERAGE2.8512.1% 7.6% 6.4%


Trimark Fund - SC $2.9-billion1.621-1.4% 3.1% 5.4%
SECTOR AVERAGE2.98 3.4%-1.4%-2.3%


1RBC Monthly Income$3.9-billion1.2113.0% 9.6%10.9%
2CIBC Monthly Income$2.7-billion1.411.1% 9.5%10.5%
3Trimark Income Growth - SC$1.8-billion1.63712.9%10.1%10.9%
SECTOR AVERAGE2.58 7.9% 4.6% 4.7%


1Bissett Bond-F$93.3-million0.86.5%6.1%7.3%
2TD Canadian Bond$4.5-billion1.077.2%6.8%7.9%
3Trimark Canadian Bond$843.8-million1.2766.4%6.0%7.2%
4Bissett Bond-A$1.4-billion1.445.8%5.4%--
SECTOR AVERAGE1.845.6%4.7%6.0%


© 2007 The Globe and Mail. All rights reserved.

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