A year of fee cutting has passed in the mutual fund industry and what a triumph it was for those who think skinflint investors and obsessive personal finance columnists are the only ones who care about the cost of owning funds.
Twelve months ago, Fidelity Investments said it would trim the cost of owning some of its funds by a meaningful amount. At the time, Fidelity clients were selling more of the company's funds than they were buying and the fee cut was supposed to turn things around. It hasn't. As of the end of October, Fidelity ranked eighth among the 10 biggest fund companies in building its assets over the past year.
CI Financial announced plans last summer to lower its fees and lock them in. CI is doing well, generally, but the company's progressive stance on fees hasn't changed its sales momentum appreciably.
And then there's AIM, which sells the Trimark funds and has long had some of the lowest fees in the business for some funds. In November, this company had one of the worst sales performances of any big company.
As ever, returns are what matter most to investors, not fees. But only a fund industry dinosaur would dismiss the importance of fees altogether.
For one thing, some of the most successful fund companies today are in the low-fee category. Example: Saxon Funds Management, which increased its assets by 50 per cent over the 12 months to Oct. 31 and posted more solid gains last month. Coincidentally, Saxon just announced that it has cut the already below-average management expense ratios on its bond fund to 0.89 per cent from 1.1 per cent and the MER on its money market fund to 0.5 per cent from 0.6 per cent.
Phillips Hager & North, a franchise built on low fees and conservative money management, has increased its assets by 20 per cent in the year to Oct. 31. That's more than all of the 15 biggest fund companies except for RBC Asset Management, BMO Investments and Dynamic Mutual Funds. Tiny Mawer Investment Management, another fixture in the low-fee world, has boosted its assets by 34 per cent in the past year.
Slim and trim fees don't sell these funds alone. Good results help, too. What's really interesting, though, is that many funds from low-fee families have great long-term results but so-so returns in 2005.
Take Saxon's flagship Canadian equity fund -- Saxon Stock -- for example. It's the sixth-best fund in its category over the past 10 years, but over the past year it clocks in at 206. Still, the fund's assets are up 44 per cent in the past year, much more than gains in the stock market would explain. The point is that if you deliver consistent numbers and charge a reasonable fee, then investors will buy in.
So what's the disconnect with Fidelity and AIM? Their problems show how a reasonable stance on fees doesn't get a company much credit when it faces problems in other areas.
Income trusts are the biggest stock market story since the crash of technology stocks and many fund companies have helped their clients make huge money in them. Not Fidelity, though. It just got around to introducing funds in the Canadian Income Trust category last May.
At least Fidelity has such a product in its lineup now. AIM still doesn't. Neither does the company have much in the way of energy stocks in its portfolios. That's a totally justifiable and certainly gutsy call to make, but it's costing the company in terms of fund returns.
The big numbers put up by energy stocks, trusts and the Canadian market as a whole in the past few years make it a terrible time to pronounce on the impact of fee cutting. Fat and happy investors can't tell you the cost of anything in the portfolio because they're too busy looking at the percentage increases in their holdings.
This will end as soon as the next stock market downturn, though. With returns in the red, investors will naturally start to wonder how much money their fund companies are making. High-fee companies are going to look greedy here, especially because there are lower-fee alternatives out there, not only from small players like Saxon but also from big fish like AIM, CI and Fidelity.
A stock market downturn would also highlight the way that low fees benefit both investors and fund companies. By charging less to run a fund, a company leaves more on the table for investors. In a harsh market environment, this can mean the difference between investors making money and losing money and the difference between investors staying with their funds or bailing out.
Fund companies like to say that investing in their products works best for those willing to hang on for the long term. The same goes for lowering fees -- give it time and the benefits will flow to fund companies and investors alike.
© 2007 The Globe and Mail. All rights reserved.
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