No-loads outperform, but don’t outsell load funds

(March 21, 2003) No-load funds have been outperforming their load fund peers, according to research by Toronto consultancy Investor Economics. But they have not been capitalizing on their advantage. The reason: Even no-load companies are stressing the value of advice.

“Many advisors believe load funds produce higher returns because they have the savviest managers,” notes the latest issue of Investor Economics Insight. By contrast, Insight says, “The media tend to favour no-loads in the erroneous belief that their sponsors all wear white hats and charge less.”

Investor Economics found that, over a five-year period, no-load funds, on average outperformed load funds. The outperformance was particularly marked in the income trust category. However, no-load funds lagged in both the U.S. and international and global equity categories. “That is not surprising,” Insight says, ” given that the no-load ranks are heavily populated by smaller Canadian-based investment counsellors with limited international expertise.”

The picture changes a little when three-year and one-year returns are considered. Over those time periods, Canadian equity funds with load charges proved better performers, while no-load funds retained their edge in the bond, dividend and income trust categories. It was a toss-up in the other three categories Investor Economics scrutinized: U.S., and global and international equities, and Canadian balanced funds.

Investor Economics attributes the outperformance to lower management expense ratios. “Our asset-weighted MERS show them with an advantage ranging from 58 to 122 basis points,” that is, 0.58% to 1.22%. The exception was the Canadian balanced category, where no-load MERs were marginally higher.

But, Investor Economics reports, that edge has not translated into higher sales. “It’s hard for no-loads to capitalize on their relative performance advantage in an age of ever-growing dependence on advice. Even Altamira — which used to lead the filed in performance advertising—has spent the past few years focusing their marketing on advice, not ratings or returns.

Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(03/21/03)