Reader Mike has the following question:

In my various reading adventures over the last year, the overwhelming message is to move to ETF/index funds/passive portfolio management using a self-directed account. The counsel seems to end there. What does one do with the newfound purchase freedom? My prime motive in moving is to lower the expenses for holding investments. In my case, my RSP investments are primarily mutual funds.

I could:

  1. Sweep through and sell everything single one of them, incurring lots of DSCs, and buy ETFs.
  2. Wait until I’m clear of the DSC snag before unloading the funds (but then what was the point of transferring my account?)
  3. Switch to a fund within the same family that possibly has a lower MER, explore some of the cheaper fund classes that are out there.

Option 3 seems best, not knowing exactly the total DSC potential without checking each funds DSC rate, but it’s a daunting task given that there are so many possibilities. The point of this was to make it passive investing. I don’t mind following though on finding equivalent, cheaper funds within each fund family if that’s what it takes. I’m curious to know what other’s experiences are and if there is better approach.

If you substitute stocks for mutual funds, your dilemma is similar to the one I face, except that I do not have to pay a fee for selling a stock early. I would suspect that a similar strategy to the one that I adopt with stocks would work for you:

  1. Devise your asset allocation targets based on your age, risk tolerance etc.
  2. Invest new money into index funds so that it brings you closer to your asset allocation target.
  3. Whenever a stock position is sold, invest the proceeds in index funds according to the target established in (1).

I am afraid that you have no alternative other than analyzing each mutual fund that you currently own and deciding whether to sell or hold. Some funds may have posted such a terrible performance that it may make sense to bite the bullet, take the DSC hit and sell. Others may have a satisfactory performance and you may decide to hold them for now as a proxy for one of the asset classes you want to be invested in. Fortunately, taxes are not a consideration because your holdings are within a RRSP. I welcome readers to share their thoughts on Mike’s question.

This article has 13 comments

  1. Why does everyone like Index Funds? You are buying on momentum, or some grand theme like ‘the economy’. Seems to me that you are getting the short end of the stick over a well-researched diversified basket of say 20 stocks.

    Just a thought.

  2. Would you have to pay a capital gains tax on the mutual funds which you sold ? Or incur a capital loss ?

  3. I wouldn’t rush out of the DSC funds – it’s unlikely over the short term that it would be worthwhile.

    You didn’t mention how much money you have invested – all the big MF companies have programs where they will rebate some management fee and the advisor can also rebate some of the trailer. I’m not sure if this would apply to DSC but I’d say if you have at least $50k then ask (demand?) the advisor to look into this. You might be able to get a quarter to a half percent knocked off. If you had front end or low load then you could be looking at up to 1% off (since the trailer is so high).

  4. I believe that in order to get a better picture of the situation we would need to know the complete history. By that I mean what are the actual mutual funds that Mike owns, hopefully with the correct fund code #. How much money does he have invested into each fund, what are the purchase dates? Who does he use for a broker? We would not need to know the $ amount of his investments, a % value would do the job nicely.

    Over the last year I have gone through this process. The hardest part was getting a handle on the actual cost of each mutual fund that I owned. The good news is that once I had a spreadsheet setup I was able to see how much money was being taken from me every year. I also have the spreadsheet set up to show me sector by sector, country by country breakdown of my RRSP account. I update my sheets once a year. It was a lot of work the first time, but very quick now.

    If Mike wanted to post the required data, I’m sure this would be a good “class project” so to speak for us.

    Cheers

  5. Canadian Capitalist

    Sol: I am not doing too bad with stocks. I am moving towards index funds because I just don’t have the time to research stocks anymore. I would still capture Canadian equity exposure using stocks and everything else using index funds.

    John: The mutual funds are within a RRSP, so there is no tax considerations.

  6. Is there a web site that lists DSCs for all canadian Mutual Fund families. I know globe fund does not.
    Abe

  7. Sol makes a good point. Not that you shouldn’t consider ETFs for broad market exposure, but a concentrated and well-researched portfolio of stocks – think Buffett – or a low-cost concentrated mutual fund gives you a good foundation for beating the market over time.

    If you go with option 3 and decide to transition your portfolio to passive products over time, don’t forget to take advantage of the “10% free DSC” each year.

  8. Canadian Capitalist

    Scott: I have my doubts if average stock investors can really beat the market. A low-cost mutual fund run by a good manager will be a great choice, if investors are willing to stick with them even when they aren’t doing so great. In fact, part of my Canadian equity exposure is through Leith Wheeler and I am comfortable with their investing style and a few bad years won’t change my opinion. I am not fanatic about indexing but about keeping costs low.

  9. Hey CC. I don’t know what the definition of the “average investor” might be, but here is my argument. Almost all of the typical Canadian Equity funds count the Big 5 banks and large insurance companies among the top 10 holdings. Anyone can just buy those stocks for a one time transaction fee and hold onto them forever. In that way, at least the “average investor” can beat the returns on a mutual fund because what the investor would be in effect exchanging a one time commission for a yearly 2% MER or whatever. Clearly an index fund has a much lower MER, but if you have a large portfolio, then even a 0.5% MER can be more than a one-time transaction fee. Since index funds are weighted by market cap, the highly liquid banks, insurance companies, conglomerates and whatever make up the majority of the index anyways. And if you buy them yourself, you can always leave the companies you don’t like out of your portfolio. For example, tobacco companies that make great investment returns on killing their customers. If you have a problem with that, then leave it out of your own personally tailored “index” fund. And if you sign up with E-trade where your first 100 transactions are free, then you don’t even have to worry about the transaction fees! A zero percent MER. Isn’t that enticing?

  10. Canadian Capitalist

    Phil: Fair enough. The Canadian market is narrow, so you could probably be okay with a couple of banks, an insurance giant, a couple of utilities, a resource stock or two etc. That’s about seven stocks or so.

    But what if you want exposure to US equity, EAFE and emerging markets? I would argue that indexing is better for capturing those markets. I think I’ve mentioned before that I am not planning to selling my Canadian stocks. Like I said, indexing doesn’t have to be an all or nothing proposition.

  11. To further this project, I offer the sample data. The transfer has already been initiated (to E*Trade), but is not yet complete. The Fidelity funds are gradually switching (automatically) to their no-load equivalent, and the AIC Advtg fund is partially beyond the DSC period. (Capital Int’l is ISC)

    Code Investment, Holdings
    AIC116 AIC Advantage I, 9.2%
    AIC118 AIC Value, 8.4%
    CIF843 Capital Intl Global Equity – A, 10.0%
    FID281 Fidelity CDN Asset Alloc – A, 9.8%
    FID581 Fidelity CDN Asset Alloc – A, 11.0%
    FID428 Fidelity Europe – A, 9.9%
    FID228 Fidelity Europe – A, 7.9%
    IGI260 IG Int’l Small Cap A, 7.1%
    IGI070 IG Mackenzie Univ US Growth Leaders, 1.5%
    IGI342 IG Mergers & Acquisitions A, 6.8%
    MFC838 Mackenzie Cundill Cdn Sec C, 13.9%
    MFC1637 Mackenzie Univ US Growth Leaders, 4.7%

  12. That sounds good Mike – I really hope we aren’t the same person 🙂

    Seriously – I think it’s good to take time with the transfer – some people overreact sometimes and incur lots of fees by just redeeming everything.

  13. Canadian Capitalist

    Mike: I don’t follow mutual funds, so I don’t have an opinion on which funds are worth keeping. One comment though is that you seem to have some funds that invest in the same asset classes. I also think there is a bit of performance chasing (IGI342?), so you could start with putting new money in asset classes that you are currently not capturing. For example, maybe your asset allocation calls for a 25% exposure to bonds and you could make a start by investing in XBB with new money.

    I’ll second Mike’s comment that you should be patient and take your time to sort out your portfolio.