Turns out the rich actually do get richer. At least that's the case for long-term mutual fund investments. In terms of performance, broad-based equity funds that require an initial investment of $10,000 or more have generated better returns than lower-admission funds over the past five to 10 years -- even though they make up less than a quarter of the total funds available on the Canadian market.
The starkest example is among international equity funds -- funds that invest outside North America. Over the past five years the best performing international fund with assets of at least $25-million has been the United-International Equity Value Portfolio sponsored and managed by United Financial Corp. The fund has returned an average 10.3 per cent each year, blowing away the group average of 2.4 per cent and the benchmark MSCI Europe, Australasia Far East Index return of 4.6 per cent. Investors wanting to get into the fund must have a minimum initial investment of $25,000.
The third and fourth-best performing international equity funds over the same five-year period are GBC International Growth Fund, which requires a minimum initial investment of $100,000 and Leith Wheeler International Pool Fund, which requires $500,000 to join.
The fifth top international equity performer over the same period has the highest minimum initial investment requirement on the market. To be an investor in the Acadian Core International Equity Fund you must first plunk down $5-million. Unitholders with the means have enjoyed an 8.8-per-cent average annual return.
The rich-get-richer scenario doesn't always apply. The second-best performing international equity fund over the past five years has been the CIBC International Small Company Fund with an average annual return of 9.4 per cent. You only need $500 to get into that fund.
Using the same criteria, four of the five top performing U.S. equity funds, three of the top five Canadian equity funds, and all five top performing alternative strategies funds are in the $10,000-plus club. Results are similar over a 10-year period.
Down in the cheap seats, funds with entry limits under $10,000 are the best performers in specialty asset classes such as Japanese equity, natural resources, science and technology, and Canadian small cap.
Mutual fund analyst Dan Hallett is reluctant to point to any one reason for the strong performance from high initial investment funds.
"I wouldn't think there's a relationship between minimum fees and performance," he says. The president of Dan Hallett & Associates, based in Windsor, Ont., says fund companies often impose the minimums to lower operating costs, which could lower fees and increase returns slightly for the unitholder. "Sometimes it's a bit of a marketing gimmick. A sort of exclusive club," he says.
Mr. Hallett says many mutual, or pooled funds, impose the minimums to avoid the regulatory red tape that comes with operating a mutual fund. By marketing to wealthy investors or pension plans the fund manager can become exempt from filing a prospectus -- allowing more investment flexibility.
He also says high minimums have the potential to create a more stable capital pool for the portfolio manager, which could encourage longer-term strategies, and limit trading activity and trading fees.
Mr. Hallett says another possible reason for strong returns from high minimum funds is the fact that many managers initiate a bottom-up value investing strategy, and value investors have done well over the past five years.
The fund manager with the highest entry level is Integra Capital Ltd., which imposes a $5-million minimum on some of its funds, such as the Acadian Core International Equity.
Hillsdale Investment Management Inc. offers a hedge and Canadian equity fund with $200,000 minimums. John Leoprich from Hillsdale's private client division attributes the strong performance of high minimum funds to the fee structure in which compensation for the managers often is based on performance. "If your fund manager has incentives to bring in more money, the fund will have better returns" he says. "It's all about good management".
ABC Funds sets its minimum investment level at a more modest $150,000 on its family of funds -- $250,000 on its North American Deep Value Fund. Portfolio manager Irwin Michael says the high entry level gives his team of managers the ability to focus their efforts on one pooled portfolio. "We can't handle one million people with $500 to invest," he says. "By pooling it all together we only have five portfolios. By minimizing the [total] portfolio we maximize returns."
Other companies offering high-admission funds include McLean Budden, Sceptre Investment Counsel Limited, Acuity Funds Ltd and Montrusco Bolton Inc.
Leith Wheeler Investment Counsel Ltd., Chou Associates Management Inc. and Sprott Asset Management Inc. have lowered their minimums but still require at least $10,000 to join the club.
One person who doesn't buy the exclusive-is-better theory is David Feather, president of Mackenzie Financial Services.
"I don't think it matters a whole lot," he says. The Mackenzie Universal International Stock fund is one of the three top performing international equity funds over the past 15 years. All three leading funds, including Mawer World Investment and Templeton International Stock, require minimum initial investments under $5,000. With the exception of a small family of high-end funds Mackenzie sets its initial investment minimum at $500.
Mr. Feather says the strong showing for high-end funds over the past five to 10 years is likely based on several unrelated factors. He even disputes the assumption that higher investment requirements lead to lower operating costs. "Small investors increase the chance of getting bigger funds and fixed costs are spread out among a bigger asset base," he says.
Mackenzie analysts say the strong showing from high-end funds could be partly attributed to the fact that many of the funds that don't need to file a prospectus do not need to be as transparent when it comes to disclosing fees. Standard mutual funds must subtract the management expense ratio (MER) from a fund's total return.
Mr. Feather adds that Mackenzie has no intention of raising its minimum investment requirements. "Our business model has always supported the smaller investor," he says.
Dale Jackson is a producer at Report on Business Television.
If your fund manager
has incentives to bring
in more money, the funds
will have better returns.
It's all about good
HILLSDALE INVESTMENT MANAGEMENT
We can't handle one
million people with $500
to invest. By pooling it all
together we only have five
portfolios. By minimizing
the [total] portfolio
we maximize returns.
IRWIN MICHAEL, ABC FUNDS
Our business model
has always supported
the smaller investor.
DAVID FEATHER, PRESIDENT
MACKENZIE FINANCIAL SERVICES
By the numbers
Amount in millions of dollars
you need to plunk down to get
into Acadian Core International
Acadian Core International's
average annual percentage
return over past five years.
Amount of dollars you need
to get into CIBC International
Small Company Fund.
CIBC International Small
Company's annual percentage
return over past five years.
© 2007 The Globe and Mail. All rights reserved.
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