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Mutual Fund News

The problem with mutual funds

Regardless of how they perform, most mutual funds continue to generate fees for the fund companies that run them and for the investment advisers who sell them. Good returns and strong advice can justify those fees, but how do you tell whether that's what you're getting? Let's analyze a portfolio of actual funds to see what kind of value they offer

rcarrick@globeandmail.com

Setting up your portfolio

Ten years ago, you invested $100,000 through an adviser in the five mutual funds identified below.

Comment: These funds were chosen on the basis of having below-average returns over the past decade and comparatively high fees. Each also has assets of close to $1-billion or more, which means it's quite large by fund industry standards. Go figure. All data to Oct. 31.

What you made

What your funds were worth as of last month:

Comment: These values are calculated using a feature on Globeinvestor.com's fund profiles that lets you see how much $10,000 invested in a particular fund would have worked out over various timeframes. (We used November 2001 to November 2011).

What you paid

Let's look at the fees you paid to own these funds. We'll assume your adviser did as many in the industry are doing these days and waived upfront purchase fees.

Comment: MER means management expense ratio, which compares the dollar amount of almost all fees a fund charges in a year against the total amount invested in the fund. The lower the MER, the better.

What your adviser was paid

The fees on most mutual funds include a component to pay investment advisers for advice provided to clients - it's called a trailing commission and it's included in the MER.

Mutual fund

$35,000 went into AGF CANADIAN BOND

Category: Canadian bond

Assets: $884-million

10-year return: 4.2%

Category average 10-year return: 4.5%

What you made

AGF Canadian Bond: $53,490

What you paid

AGF Canadian Bond MER: 1.86%

What your adviser was paid

AGF Canadian Bond trailing commission: 0.5%

Mutual fund

$25,000 went into INVESCO SELECT CANADIAN EQUITY

Category: Canadian focused equity

Assets: $1.5-billion

10-year return: 4.3%

Category average 10-year return: 4.7%

What you made

Invesco Select Canadian Equity: $35,615

What you paid

Invesco Select Canadian Equity MER: 2.44%

What your adviser was paid

Invesco Select Canadian Equity trailing commission: 1%

Mutual fund

$10,000 went into MACKENZIE MAXXUM DIVIDEND

Category:

Canadian dividend and income equity

Assets: $1.1-billion

10-year return: 4.1%

Category average 10-year return: 6.1 per cent

What you made

Mackenzie Maxxum Dividend: $14,237

What you paid

Mackenzie Maxxum Dividend MER: 2.42%

What your adviser was paid

Mackenzie Maxxum Dividend trailing commission: 1%

Mutual fund

$20,000 went into TEMPLETON GROWTH

Category: Global equity

Assets: $1.3-billion

10-year return: -0.2%

Category average 10-year return: 0.1%

What you made

Templeton Growth: $18,440

What you paid

Templeton Growth MER: 2.50%

What your adviser was paid

Templeton Growth trailing commission: 1%

Mutual fund

$10,000 went into RBC U.S. EQUITY SERIES A

Category: U.S. small or mid-cap

Assets: $2.7-billion

10-year return: -2.2%

Category average 10-year return: 2%

What you made

RBC U.S. Equity: $7,511

What you paid

RBC U.S. Equity MER: 2.08%

What your adviser was paid

RBC U.S. Equity trailing commission: up to 1.15%

************

What you made

Total portfolio value: $129,293

Your 10-year compound average annual return: 2.60%

Comment: This is weak. A diversified, not especially risky investing approach should get you something closer to 5 per cent annually over 10 years on average.

10-year benchmark returns: 5.50%

Comment: The benchmark stock and bond indexes for the funds you own generated this return based on your mix of investments. You can invest directly in these indexes through exchange-traded funds. Remember to reduce benchmark returns by about 0.5 per cent to account for the cost of owning ETFs, and to factor in brokerage commissions for buying ETFs. Also, having an adviser would reduce this return by another percentage point or so.

10-year average inflation rate: 2.10%

Comment: At least you kept ahead of inflation. Barely.

What you paid

Weighted average MER for the portfolio: 2.21%

Comment: Hmm, looks like your fund companies made almost as much as you did. If we apply this fee over the 10 years you owned your fund, you'd have paid close to $25,000. This information was obtained by using the fund fee calculator found on the GetSmarterAboutMoney.ca website: http://bit.ly/bxvT30

Note: Fund returns are virtually always reported to investors on an after-fee basis. In other words, the returns you see are the returns you got.

What your adviser was paid

Comment: Trailing commissions are paid directly by fund companies to advisers selling their funds and the money is usually split between advisers and the firms they work for. Trailing commissions are how advisers get compensated for the services they provide.

Examples of these services:

Developing an investment plan for clients based on their personal needs

Providing ongoing monitoring of the portfolio, with rebalancing and adjustments done as needed

Providing financial planning on a small or large scale, as agreed upon with the client

Showing clients whether they are "on track" with their retirement savings

Meeting with clients once or twice a year to discuss their progress

Help on assorted other financial matters such as debt, insurance and estate planning

Value verdict

Excellent financial planning might help offset the poor returns of this portfolio, but then an excellent adviser would not likely have used these funds. Changes are required.

THE GLOBE AND MAIL

© 2007 The Globe and Mail. All rights reserved.

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