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Mutual Fund News

Cryptic pricing keeps fund investors in dark

Solved: the mystery of why we pay such high mutual fund fees here in Canada.

It's because the fund industry has been so phenomenally successful at keeping its fees invisible to most investors. Pricing information is certainly available for funds, but not in the same prominent way it is when you buy everything from toothpaste to socks, gardening equipment and cars.

We need mutual funds to be sold with an easy-to-read price tag stuck to them, and we have a narrow window of opportunity to make this happen. A group of securities regulators have created a prototype of a concise new disclosure document for the fund industry, and they're looking for comments until Oct. 15. All right, here's a comment: Make fund companies put the price of owning their products in big, fat numbers on the front of the new disclosure document.

The proposed document, produced by a group called the Joint Forum of Financial Market Regulators, is supposed to wrap everything investors need to know about a fund into a short, easy-to-read format. On the matter of price, there's a little box on the front page to note the price of a fund. It says: "Annual expenses, as a per cent of the fund's total value (also called the MER)." As an attempt at putting a simple price tag on funds, this just won't do.

Part of the problem is the use of the term MER, which is a standard way to compare how much it costs to own a mutual fund. The MER (management expense ratio) takes almost all the costs a fund company incurs in running a fund and then presents them as a percentage of all the money in a fund.

Practically speaking, what you need to know about MERs is that they represent how much of a fund's returns are sluiced into a fund company's coffers rather than your investment account or registered retirement savings plan. A fund with a reported 8-per-cent return and an MER of 2 per cent actually made about 10 per cent.

If investors understood MERs better, they'd put a lot more emphasis than they do on price when choosing funds. As it stands now, there's a small but slowly rising level of awareness that has prompted many, but not all, fund companies to shave their prices.

We could stoke the level of competition by thinking up a simple euphemism for MER and then plunking it down at the top of the new disclosure document. Call it the cost of ownership, the ownership fee, the management fee or anything else that makes it clear there's a cost to owning funds that comes in addition to any fees incurred in buying and selling them (those fees are disclosed on the new form in an effective enough way). Once investors get comfortable with mutual fund price tags, they'll begin to treat funds more like toothpaste, socks, gardening equipment, cars and such. That is, they'll compare features and performance and then bring price into the equation to assess the overall value. In most cases, price will be one of the major factors on which investment decisions are based.

As it becomes clear that investors are gravitating to lower-fee funds, the fund industry will react by accelerating the current pace of MER reductions. Bank on it. Fund MERs are already on a slow, steady decline at many companies because they can foresee a day when they'll have to compete on price. When this day arrives, they'll be the first to reduce MERs even further while their competitors play catch-up.

Today, what sells funds is performance, not fees. Tomorrow, what will sell fees is a combination of good performance and low fees. There's a correlation between these two attributes, but never mind that. It's simple human nature to want premium goods at the lowest possible price.

It has to be said that all the information an investor needs about how much it costs to own a fund is contained in its simplified prospectus, a very informative document that few ever read. MER info is also available on fund company websites, and on mutual fund research websites like Globefund.com. Experienced investors never fail to take advantage of this pricing information, but the masses aren't taking advantage.

That's where price tags come in. Start plastering them on those new fund disclosure documents and we'll see the fund industry come under the same price pressures as sellers of toothpaste, socks, gardening equipment, cars and such.

Fund companies have managed to keep their pricing largely invisible or incomprehensible to customers for decades. If the Joint Forum of Financial Market Regulators does its job, it's game over for this bit of investor exploitation.

Low-cost Canadian equity funds

FundMER10-Year average annual return
PH&N Canadian Equity1.13%10.20%
Mawer Canadian Equity1.2411.3
Beutel Goodman Canadian Equity1.429.9
Leith Wheeler Canadian Equity B1.511.5
Trimark Canadian SC1.646.7
Sceptre Canadian Equity A1.69N/A
Saxon Stock1.8611.7
RBC Canadian Equity1.999.9
Category Average2.538.2

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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