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Investors get break on costs of mutual funds in 'clear trend'

Management expense ratios on 29 mutual fund asset classes fell last year, while four rose only slightly, KEITH DAMSELL writes

Mutual fund costs borne by the investor are falling and more declines are expected, an industry study has found.

The management expense ratios (MER) of 29 mutual fund asset classes fell between December, 2003, and December, 2004, concludes an April study by Investor Economics of Toronto.

Research found that MERs in only four asset classes -- mortgage funds, Canadian equity small-capitalization funds, Canadian equity specialty resource funds, and high-yield bond funds -- reported slight cost increases during the same period. That's a significant reversal from 2002, when 18 of 32 fund classes reported rising MERs. In 2001, 26 of 33 fund classes raised costs paid by the investor.

"There's a pretty clear trend toward lower MERs," said Goshka Folda, senior consultant and managing director of the financial services consulting firm. "This is good news. It's a reflection of the competitive nature of the industry."

The MER -- the level of costs charged to investors expressed as a percentage of a fund's assets -- is a hot topic. Choppy markets coupled with competition within the industry and from alternative investment products have pushed senior management at several firms to rethink MERs.

CI Fund Management Inc., Royal Bank of Canada and Fidelity Investments Canada Ltd. have all recently cut -- or plan to cut -- MER fees.

Unfortunately, deciphering MER data is akin to alchemy. The explosion of fund wraps, new fee load structures and brokerage accounts with fixed costs have made analysis and cost comparisons among funds increasingly difficult, Investor Economics said.

"Nothing is a simple as it looks," Ms. Folda said. "It has become more and more complex to compare apples to apples."

Norshield stuns investors

Investors in Norshield Financial Group Inc. can't say they weren't warned. The Montreal-based company stunned investors last week when it suspended redemptions, freezing a $375-million pool of hedge funds.

"The funds are invested in particular funds or investments which may not be redeemable or liquid for a period of time . . . there is a risk that a fund may have significant illiquid investments which are difficult for such fund to dispose of rapidly at favourable prices in connection with redemption requests." -- from "Item 8 - Risk Factors" noted in the company's Olympus United Funds offering memorandum, June 21, 2004.

IFIC methodology flawed

Altamira Investment Services Inc.'s April fund sales report was a head scratcher. Depending on your analysis, the Toronto-based subsidiary of National Bank of Canada is finally back in the black or is guilty of casting the best possible light on its hemorrhaging mutual fund business.

Under the headline "Altamira Reports Strongest Monthly Sales in Five Years," the company last week noted net April sales of $95-million. Indeed, net sales of "other investment solutions," including the company's high-interest cash performer product, were $141.5-million. But traditional mutual fund sales remain in redemption, with a dismal $46.5-million in investment dollars headed out the door.

Altamira's spin cannot be dismissed, however. It highlights the flawed methodology behind sales data released each month by the Investment Funds Institute of Canada. The widely reported figures are a selective look at the market's investment activity. Institutional dollars are not counted.

For example, growing pension fund business has brought total assets under management at Toronto-based Fidelity Investments Canada Ltd. close to a record $40-billion. But IFIC considers only the company's shrinking retail trade, making Fidelity's performance look ugly month after month.

Meanwhile, some firms, such as Capital International Asset Management (Canada) Inc., manager of more than $700-million in retail assets, do not provide monthly sales data to IFIC. And perhaps most important, the institute's sales figures do not include hedge funds, closed-end notes and structured products.

"People are continuing to allocate money in these spaces, and it's just not captured," said Peter Shippen, a fund analyst at TD Waterhouse Group Inc.

Tom Hockin, IFIC's long-serving president, will leave the lobby group in October. There is some hope the new boss will take overhaul reporting methods.

Investors wary of linked notes

The hedge fund sector's continuing woes have dealt a nasty blow to the protected-note market tied to that volatile asset class.

The February meltdown of Portus Alternative Asset Management Inc. and last week's suspension of redemptions at Norshield Financial Group Inc. have left the public cynical of hedge funds and linked notes in particular, industry sources report.

Recent note offerings from BluMont Capital Corp., Arrow Hedge Partners Inc. and Abria Financial Group Ltd. have fallen short of sales expectations.

Distribution channels are skittish, too. For example, Bank of Nova Scotia and Assante Corp. are no longer selling hedge fund notes.

"Headline risk" for hedge funds is at a peak, reports Jamie Colliver, a partner with Integra Global Advisors of Toronto. "Every time an article appears it becomes more difficult to develop a product."

Ironically, business is steady for guaranteed notes linked to the performance of plain-vanilla mutual funds. Major players such as Bank of Montreal and CI Fund Management Inc. enjoyed strong winter sales and report continued demand this spring.

Stay tuned. Pro-Hedge Funds Inc. of Mississauga, plans to test the waters with a hedge fund note issue later this month.

kdamsell@globeandmail.ca

Asset-weighted MERs

By major asset class

Asset class...............2000......2003.....2004

All funds.........................................2.14%..2.11%..2.02%

Short-term funds................................0.96.....0.97.....0.96

Long-term funds................................2.30.....2.31.....2.17

Canadian bond.................................1.39.....1.47.....1.36

Foreign bond..................................2.07.....2.15.....1.69

High yield bond...............................1.59.....1.61.....1.62

Canadian balanced...........................2.26.....2.29.....2.28

International balanced........................2.58.....2.67.....2.63

Equity income fund...........................2.15.....2.10.....2.05

Canadian equity dividend..................2.16.....2.08.....2.03

Canadian income trust.....................2.11.....2.17.....2.11

Canadian equity funds.......................2.37.....2.42.....2.22

Canadian equity multi-cap................2.37.....2.38.....2.25

Canadian equity small-cap...............2.55.....2.62.....2.63

Canadian equity specialty resource.....2.50.....2.59.....2.79

International equity funds..................2.44......2.57.....2.49

International equity global...............2.33......2.48.....2.39

International equity specialty............2.65......2.85....2.84

U.S. equity funds...........................2.24......2.33.....2.05

U.S. equity multi-cap.....................2.31......2.42....2.09

SOURCE: INVESTOR ECONOMICS

© 2007 The Globe and Mail. All rights reserved.

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