The Case Against Mutual Funds Part 6

At Least We're Not in Last Place Anymore.

Great News! Canada no longer ranks dead last in the international ranking of how much mutual-fund investors pay in fees. According to global rankings released recently by Morningstar Canada is now only “below average. Both Italy and Taiwan fell below Canada in the latest rankings as countries that pay higher investment fees than Canada.

In spite of this “improvement”, the report shows that Canadians pay a median of approximately 2% in fees (per year) for equity mutual funds (funds that hold some amount of stocks). A large majority of funds still pay an annual fee to compensate fund dealers (the well-dressed sales person who sells you the funds).

Executives in the Canadian fund industry apparently don’t see anything wrong with this. In fact, they argue that researchers are not using the right metrics and, in fact, the (high) fees in Canada are quite comparable to the fees in higher-ranked countries such as the US.

Here’s an excerpt from a recent Globe and Mail Article about this report.

Paul Bourque, CEO of the Investment Funds Institute of Canada (IFIC), said that while the 2019 report has improved by breaking out individual fund fees that are specific in Canada to show averages for commission-based advice, fee-based advice and do-it-yourself funds, the report is still comparing apples to oranges.

“In our own analysis, when we look at the total cost of ownership – including advice – Canada is very comparable with the U.S. in terms of the MER [management expense ratio] for a balanced fund sold with advice,” Mr. Bourque said.

This may be true. However, the real issue is whether investors receive any added value for the 2% per year in fees we pay to mutual fund companies in the first place.

History is not kind to the fund industry

In Canada, there is $1.75 Trillion dollars invested in mutual funds (as of July 31, 2019) [source https://www.ific.ca/en/info/stats-and-facts/]. That’s $35B (2%) in fees paid by Canadians every year. For negative added value.

As I’ve already written in the past, research shows over long periods of time (15 years), over 92% of mutual funds perform worse than the stock market benchmark they were supposed to beat (in order to justify their fees in the first place).

Real Investment Professionals

There are, in fact, real investment professionals who can add real value to justify the fees they charge for managing an investment portfolio. Unfortunately, they’re not easily accessible to most investors as they’re not managing mutual funds. That’s a topic for another day.

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