Monday, March 14, 2011

Morningstar Says Canadian Mutual Funds Fail on Fees

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.

The report doesn't include 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.


  1. The awarding of an overall grade for surveys like this bugs me. Canada gets an overall C+, but with an F for fees. Fees are by far the most important factor in fund performance. You can put lipstick on a pig, but it's still a pig.

    Reminds me of Warren Buffett saying that ethics is a pass/fail grade, in relation to Bill Clinton arguing that his ethical lapses paled in comparison to his accomplishments.

  2. @Gene: I agree with you. To make a school analogy, you should have to pass all your courses to pass the term.

  3. @Patrick: I agree that people should seek lower fees. They should also look to get something for their money. Anyone can follow a couch potato portfolio. Advisors need to add value to justify their fees.

    1. The comment above was a reply to Patrick Lenouvel Portfolio Manager's comment:

      Every year, we hear the same comments. Canadian pay the highest fees in the world, but nothing is done to change the situation. Thanks for your comments and especially explaining why there is no reasons this should happen.

      The real problem is that most Canadian use our big banks and their brokerage facilities to invest or use high fee mutual funds instead of using, as is the case in most countries, financial experts that provide services at much lower fees. For example, most American will prefer to use the service of a Registered Investment Advisor (RIA) than investing through their bank. They believe the service is more professional and targeted to their particular needs. In Canada, this is the opposite. Investors prefer to deal with banks and do not seem to care that fees can be lower somewhere else. For example at our firm, Japa International Asset Management, a registered portfolio management firm, we charge between 0% and 0.25% on government T bills and bonds, 0.50% on preferred and corporate bonds, 0.50% on ETFs and low fees on equities. In addition, the portfolio is managed on a discretionary basis. In other word, Clients no longer needs to make the investment decisions. We are always surprise to hear from prospective clients that have hundred of thousand of dollars, the level of fees that often is charged. Investment professional should be paid for value creation, not to place products. If there is no value creation, there should be minimum fees.