Fund fees highest in world: revised study

The study that raised the hackles of the Canadian mutual fund industry has been republished, with updated data that reaffirms its original finding: Canadian investors pay the highest fees in the financially developed world.

“While the mutual fund structure is comparable from country to country, fees vary around the globe,” the authors of the report write. “For example, in 2002, the asset-weighted average expense ratio for equity funds worldwide was 1.29%, ranging from 1.05% in Belgium and 1.11% in the U.S. to 1.92% in Japan and 2.56% in Canada, and fee variation at the fund level is even more pronounced.”

The study, entitled Mutual Funds Fees Around the World, was conducted and published by Ajay Khorana, associate professor of finance at the Georgia Institute of Technology; Henri Servaes, professor of finance at the London Business School; and Peter Tufano, professor of financial management at Harvard Business School.

Defending the study as “robust,” the trio has republished it using a fresh database, which nonetheless confirmed their original findings. The study’s authors assert that they did not double-count both front-end and back-end loads, as some Canadian critics had charged.

“Our point about the Canadian MERs is that they always incorporate payments for distribution, while other jurisdictions do not,” says Joanne De Laurentiis, president and CEO of IFIC. “When you take our numbers and compare them to other jurisdictions’, we don’t have an apples-to-apples comparison. It’s really as simple as that.”

IFIC’s response has come under criticism from the mainstream press, with columnists questioning the motivations of an organization that represents those companies that collect fund management fees.

“The authors have always tried very hard to explain to readers that they need to be cautious in the way they interpret the data,” she says. “In this report they are clearer about that.

“The approach that many have taken — that the end consumer is paying more in Canada than anywhere else — is not an accurate conclusion.”

The study used three different measurements of fees, ranging from the straight management fee (charges levied each year by funds for management services), total expense ratio (all annual expenses levied by a fund on its investors) and total shareholder costs (the expense ratio plus an annuitized form of loads). The results were also asset-weighted.

One drawback of the study is that the data used is already quite dated, having been drawn from 2002.

The study examined fees charged by 46,580 mutual fund classes offered for sale in 18 countries, accounting for about 86% of the world fund industry in 2002.

Using data from Morningstar and Lipper Fitzrovia, the researchers found that Canadian mutual fund investors consistently paid higher fees on their investments across the major asset classes.

Take your pick: Bond funds? Canadian domiciled funds charged 1.41% in management fees, compared to the mean of 0.62%. The total expense ratio was 1.79% in Canada, compared to a multi-national mean of 0.91%.

Canadian balanced funds charged an average TER of 2.63%, compared to the study’s mean of 0.98%. The gap narrowed slightly on equity funds, with Canadian investors paying an average TER of 2.56%, compared to a mean of 1.29%. Across the entire study sample, Canadian funds charged an asset-weighted average TER of 2.20%, compared to just 0.95%.

The authors admit that their research does not take into account that investors may have negotiated lower sales charges but point out that such a situation would not affect the calculation of either the management costs or total expense ratios.

After factoring out various skewing variables, such as the number of countries in which a fund is distributed, and those funds domiciled offshore for tax purposes, the researchers found pricing differences persisted from country to country.

“The remaining differences are associated with a variety of factors, the most robust of which is that stronger investor protection is associated with lower mutual fund fees, and this effect is stronger for fund-specific rules than for general measures of judicial quality.

“For example, rules that govern conflicts of interest between investors and investment managers are associated with lower management fees. Certain fees are also lower when funds are domiciled in countries with an older fund industry.”

The authors also point out that lower management fees tend to be more common in wealthier countries and those with better educated populations. Low concentration in the banking industry was also cited as a factor in keeping fees low, as was the prohibition of banks from the securities business.

In answer to another criticism, the authors said they also had factored out the impact of goods and services taxes from the results of countries where such a tax is charged on mutual fund management.

Total Expense Ratio by country of domicile, broken down by asset class
Country	Balanced	Bond	Equity	Full Sample
Canada	2.63	1.79	2.56	2.20
United States	0.89	0.78	1.11	0.81
Lowest Fee (Country of Domicile)	0.72 (Austria)	0.55 (Austria/Finland)	0.64 (Netherlands)	0.64 (Netherlands)
Study Mean	0.98	0.91	1.29	0.95

Source: Khorana, Servaes and Tufano, Mutual Funds Fees Around the World

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(05/08/07)

Steven Lamb