Morningstar’s latest country-by-country fund report card gave Canadian funds a failing grade for the excessive fees they charge investors. However, it’s what the report doesn’t say that may confuse investors.
In looking through the report summary and even the full report you won’t find an assessment of the returns earned by each country’s funds. The grading categories are 1) regulation and taxation, 2) disclosure, 3) fees and expenses, and 4) sales and media. No grades are given for earning good returns for investors.
This is likely to surprise many mutual fund investors. After all, the point of investing is to earn returns. What could possibly be more important to evaluate than whether funds did a good job of earning returns for investors?
The reason that grades aren’t given for returns is that it isn’t possible for funds to collectively give above-average returns. In the same way that not every child can be above average, not every fund can be above average. The mutual fund industry controls such a high percentage of investing dollars that the typical fund must be about average before we take into account the fees they charge investors.
This is where Canada’s failing grade becomes important. We wouldn’t be too concerned about fees if all the mutual funds were earning fantastic returns. But they aren’t. The math says that most funds must be about average before fees and expenses. This means that Canada’s high mutual fund fees drag returns from about average to dismal.