Reaching new heights in corporate clumsiness, the mutual fund industry is trying to get serious about the excessive cost of owning its products.
And so we've seen a series of announcements in recent months about fund companies capping their administrative costs. I'll explain exactly what this means in a moment, but first, let's reflect on how perpetually off-balance the fund industry seems when it comes to fees.
Let's be clear here - there's been some positive news on fees recently. Very good mutual funds at a variety of companies are getting a little cheaper to own year by year, and this is enhancing returns for people who have collectively invested many billions of dollars in these products.
It's not surprising that you haven't heard this message from the fund industry. To talk about fee cuts in fundland is to open debate on the overall level of fees, and that's a dicey topic because Canadian investors pay among the highest fees in the industrialized world. A team of global finance professors came to this conclusion in a study issued in May, but the fund industry disputes this in a vague sort of way that involves no actual data.
While most fund firms decline to report their progress in cutting fees, the industry does realize the importance of this issue. There's a very modest but growing level of awareness of fees among investors and a company has to be careful or it will stand out as greed central.
This brings us back to those caps on administration costs, which companies like CI Investments Inc., Toronto-Dominion Bank, Royal Bank of Canada, Mackenzie Financial Corp. and Investors Group Inc. have been adopting to show what good citizens they are. Mostly, the fee caps are about optics and not about truly reducing the fees that investors pay to own funds.
There are two major components that go into these fees - management fees that cover fund operating costs and compensation for advisers who sell funds, and administrative fees that pay for back-office stuff like legal and auditing costs.
Management fees have long been fixed by fund companies, and now the same is being done with administrative expenses. The net result is an improvement in the usefulness of fund management expense ratios, which are an accounting of the percentage of assets in a fund that are eaten up by management and admin costs in a year.
In the past, published fund MER numbers have been based on administrative fee data that could be one or two years old and thus not reflect recent moves up or down. With both management and admin costs fixed, MERs are starting to become definitive.
As it happens, companies that fix their admin costs are using the opportunity to reduce their overall MERs. Not much is being made of this and it's easy to understand why. In most cases, the fee cuts are distinctly underwhelming. Example: Investors Group, the country's largest fund company and one of its higher-fee players, announced the adoption of fixed admin fees last month and at the same time lowered management fees on some of its funds by 0.05 to 0.1 per cent.
Independent mutual fund analyst Dan Hallett said a fee cut has to be at least 0.2 per cent to be truly significant, but he doesn't dismiss the reductions announced by IG and others. "You don't want to beat them up too much because anything is good, as long as it's in the right direction."
That said, Mr. Hallett has uncovered a couple of reasons to temper your gratitude for capped admin fees and any resulting modest MER reductions. One is that a select few admin costs are exempt from the cap. For example, he said the additional costs of complying with any new rules from securities regulators are not typically part of the cap.
Also, fixing admin fees creates an opportunity for a fund company to squeeze extra profits from funds providing it can cut operating costs. "If they can bring the actual cost below the cap, then it becomes a profit centre," Mr. Hallett said.
It's possible just the opposite will happen, of course. CI, which led the industry in capping its admin fees back in 2005, has trimmed the MER for its $5-billion Harbour Fund to 2.33 per cent from 2.45 per cent at the end of '05.
Still, it's hard not to be cynical about the way the broader fund industry is dealing with fees. Investors barely understand MERs and their corrosive impact on returns, and yet fund companies have gone off on a tangent by addressing admin costs, a mere component of MERs.
Fixed admin fees are a good thing, for sure. But meaningful MER cuts are even better, especially when they're publicized in a forthright way so that investors can grasp the change and personal finance columnists can praise it. How about it, guys?
Fixing administration fees
Here's the capped fee range recently announced by Investors Group. The fees are expressed as a percentage of assets in a fund.
|Fixed income||0.13% to 0.16%|
|Balanced||0.17% to 0.20%|
|Canadian equity||0.17% to 0.19%|
|U.S. equity||0.18% to 0.20%|
|Global equity||0.18% to 0.20%|
|Regional/sector/specialty||0.13% to 0.23%|
SOURCE: INVESTORS GROUP
© 2007 The Globe and Mail. All rights reserved.
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