Mutual Fund Fee Comparison Report Deeply Flawed
Mackenzie Financial is a favourite mutual fund company on this blog. In the past, they’ve put out such research reports as I thought I wanted an ETF or how top ten active funds are allegedly better than index funds that for the most part tried to pass along marketing spin as serious research and provided us with plenty of grist for the mill.
Therefore, it was with much anticipation that I read Mackenzie’s latest “research” report titled Canadian Mutual Fund Ownership Costs: Competitive Relative to the U.S.. In keeping with Mackenzie’s track record, the report is based on some very questionable assumptions and data.
The report claims to make an “apples to apples” comparison of advisor sold mutual funds in the United States and Canada and concludes that the “average Canadian pre-GST COO [Cost of Ownership] falls within the range of U.S. managers”. Before Canadian investors get all warm and fuzzy, they should note that the comparison is based on a key assumption: advisor-sold funds in the US collect a 5 percent front-end load and are sold after 5 years. It’s not clear where such data was obtained. Now, I’m not the most knowledgeable person when it comes to U.S. mutual funds but a quick search revealed plenty of studies on fees paid by mutual fund investors in the U.S. Take this report titled 2010 Investment Company Fact Book put out by the Investment Company Institute — a fund industry association, which casts serious doubt on the validity of the assumption that U.S. investors pay an ~5% front load.
… investors generally pay much less in sales loads than they did in 1990. For example, the maximum front-end load [emphasis mine] that an investor might pay for investing in an equity fund remained roughly unchanged between 1990 and 2009, hovering around 5 percent. However, the front-end loads that equity fund shareholders actually paid—sometimes referred to as the “effective load”—have fallen significantly, from 3.9 percent in 1990 to only 1.0 percent in 2009.
Another report titled Trends in Fees and Expenses of Mutual Funds, 2009 by the same organization reiterates these conclusions and expands on the reasons for declining loads:
Load fees now contribute considerably less than fund expense ratios to the total fees investors pay to invest in mutual funds. For example, load fees now contribute just 13 basis points to the annualized cost of investing in stock funds [emphasis mine], while fund expense ratios contribute 86 basis points.
The report goes on to state three reasons why load fees in the U.S. have declined substantially. First, the cost of advice paid by U.S. investors in embedded in fund fees. Second, load funds purchased within a retirement plan is often waived. And third, even for purchases outside retirement plans, load funds offer significant load fee discounts for large investors.
The Investment Company Institute data compels us to conclude that the Mackenzie report is based on seriously flawed assumptions. There are other questionable assumptions in the Mackenzie report that we’ll dwell into in future posts. Meanwhile, the next time Mackenzie conducts research and is looking for a suitable title, may we suggest, “Oops!… we did it again!”.