MERs on the decline, likely to fall further, study concludes

(May 2, 2005) Management expense ratios are falling, but as usual, the whole MER issue is as complicated and difficult to track as ever, according to Investor Economics.

The declines are good news for investors, the fund researcher says, but the MER is also suffering erosion of its usefulness as a comparative tool due to the time lag in reporting and the proliferation of different asset classes and compensation structures.

Last year, 29 mutual fund asset classes had lower MERs, twice the number compared to the previous year, IE says in its latest Insight report. And for the first time in recent years, the declines were significant, averaging 23 basis points. MERs were up last year in only four categories: mortgage, small cap equity, equity specialty resource and high-yield bond funds, and each of those increases was modest, the study notes.

“Bear in mind that these numbers do not reflect management fee reductions, rebates and various tweaks announced recently by a wide array of companies. So, we expect MERS to go still lower as the reported figures reflect these changes.”

The demise of the foreign content limit, a foregone conclusion no matter who forms the next government, Investor Economics believes, will be another factor in lowering MERs.

Much of the overall MER decline has been due to a shift in investor preference from higher cost equity funds to income-oriented funds that cost less, IE notes. “Related to this has been a shift from load companies with a strong equity fund base to somewhat cheaper no load sellers, especially the banks, who have traditionally based more of their business on income-oriented product.”

Still, there’s more to the story than just decreases. The complexity of comparing MERs among individual funds, asset classes and fund families, has become so much more difficult that we have had to substantially enhance our methodology for gathering and analyzing MER data, IE says.

So, Investor Economics limited this year’s MER study to apples to apples — that is, analyzing traditional open-ended funds marketed on a standalone basis to retail investors.

Moreover, regulatory changes and moves toward more transparent and more flexible pricing are making it much harder to use MERs as a comparative tool in gauging the cost of mutual fund ownership.

And the question remains: How much do investors, and for that matter advisors, really care about MERs? Generally, the top-selling fund categories have lower MERs than those being redeemed. But there’s a very small gap between dividend and income trust funds. “The income trust funds that are flying off the shelf show almost no spread at all. This suggests advisors and investors still seem to ignore fees when dining on the flavour of the month.”

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