CI takes unique approach to fee reductions

(June 24, 2005) Industry analysts are welcoming CI’s move to set a fixed administration fee for its mutual funds, one that can only be changed with investor approval. However, the approach will result in relatively modest cuts in the overall management expense ratio (MER).

CI announced the change on Thursday, promising lower costs and greater transparency for investors.

Fund analyst Dan Hallett calls the fee cut a positive move and says CI unitholders should see some immediate cost savings. “As long as these caps are written into the prospectus, CI fund investors will have some cost certainty going forward.”

Morningstar investment funds editor Rudy Luukko says the reduction is a departure from the norm, since management fees are usually fixed and expenses fluctuate. “But administrative fees will be set at a specific level in the prospectus and can’t be raised unless investors approve,” he notes. CI will ask for unitholder approval in August and plans to introduce the new pricing system in September.

Still, Luukko says he doesn’t see this is a radical change since the largest component of the MER (management fees) is left untouched. “The overall reduction in MERs is welcome, but relatively modest.”

Under CI’s proposal, administration fees will be set at 0.2% for Canadian equity funds, 0.21% for U.S. equity funds, 0.22% for global equity and specialty funds, 0.17% to 0.2% for income funds, and 0.17% to 0.22% for balanced and portfolio funds.

In addition, CI plans to breakdown all components of the MER in the prospectus. For example, Synergy Canadian Class will have a management fee of 2% and an administration fee of 0.20%, for a pre-tax MER of 2.2%. With GST and other taxes of 0.16%, the fund’s total MER will be 2.36% (down from 2.55% in 2004).

CI spokesperson Murray Oxby says the average MER decrease is in the 12-15 basis points range. Although the new pricing system currently applies only to CI funds, the firm plans to use the same approach with Assante funds in the future, he says.

CI Mutual Funds president Peter Anderson says the new system ensures investors will know exactly how much they are paying in fees. “Currently, MERs are variable and unknown to investors until after the fact,” he said in a release. “Under our proposal, total fees can only go up if securityholders expressly give their approval. This is not the case in the industry today.”

Hallett notes that the capping approach is feasible for CI, since the company has long been recognized as having a very efficient back office platform.”

And Luukko adds that CI has recently completed a series of fund mergers. “They’ve gained economies of scale and are passing on the savings to investors.”

One possible downside to CI’s change is that it creates some rigidity in terms of passing on reductions in operating costs, Luukko says.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com