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moneysense.ca, 29/04/07
The Importance of Mutual Fund MERs
In response to a long-running debate on the merits of the Smith Manoeuvre, a financial planner made the following comment:
The best portfolio is a diversified portfolio, MER be damned.
The MER (or management expense ratio) refers to the management fees, trailer fees paid to your investment advisors, administration charges and GST. MER is reported as a percentage of assets under management for the previous financial year and could vary from year to year.
While the returns advertised by mutual funds already account for the MER, investors should still pay attention to how much fees they are paying because a higher MER does not mean a better product. In fact, many studies have demonstrated the opposite: the lower a fund’s fee, the better its odds of posting future returns that are better than average. As John Bogle likes to say: “in mutual funds you don’t get what you pay for. You get what you don’t pay for”.
The next time you are investing in a mutual fund, picking the one with the cheapest MER in its class will increase your odds of success. Better yet, you could simply pick the cheapest index fund.
moneysense.ca, 29/04/07
My father used to tell me, “if you’re going to do something, do it right.” I find it hard to believe that someone will take on the leverage risk and all the extra work of the SM for the sole purpose of tax breaks, they’re doing it to maximize their net worth, and that also involves watching the pennies on the investment side.
That said, I too am an incorrigible skeptic
Or at least emotionally unprepared to ever do it myself. I’d prefer to plan sooner to achieve my goals than add risk and leverage.
The best portfolio is a diversified portfolio, MER be damned.
This is the stupidest comment I’ve ever heard. Is he saying that you can’t have a diversified portfolio without high MERs? Or is he really saying “I’m maximizing my compensation at your expense but don’t worry about it”.
I would fire this guy if he was my FA.
I put a much longer SM rant on the comments section of that blog.
Steve: I am not planning on implementing the SM either and I am very wary of leveraged investing in the stock market. Buffett is fond of saying that “the markets can stay irrational longer than you can stay solvent” and I hope investors are aware of what they are doing.
Mike: Of course, there is a bit of self-interest involved in claiming that MERs don’t matter. If future equity returns trail that of bonds, people who implemented the SM would wish they’d never heard of it.
I just got my copy of this month’s MoneySense magazine and in page 15, there is a column titled – “Pay less, get more”. The author, Duncan Hood, cites research in the US and Canada and says:
“For every percentage point your fund company charges you in fees, your return goes down by one percentage point”.
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The remark on MER be damned, diversified portfolio matters is not that idiotic when taken in the right context. Sure, all else being equal, every .1% in average portfolio MER drags down returns. However, I think the original poster’s point could be taken in a positive light as saying “if you are trying to put together a portfolio that needs to beat not 0% but 4% (the post-tax hurdle if you have a 6% HELOC), it is doubly important that you have a well-diversified portfolio of investments to minimize the volatility. Getting this diversification can be worth buying a higher-MER investment to make it be more optimal. Furthermore, if you have limited time to dedicate to finding the optimal investments, you will do better to pay a higher MER and spend your time creating a balanced portfolio than chasing the lowest MER but not thinking through risk diversification”. That’s a longer statement, and more nuances, but I think (I hope) that’s what the poster had in mind.
There is a real structural issues about fees in the Canadian context that I am discovering. See http://www.thickenmywallet.com for details. It ain’t pretty that’s for sure.
Every point they make, you lose, it’s a zero sum game, they either give you the money, or they take it themselves.
Anybody who wants you to take a high MER mutual fund, must have invested in the Funds Parent company or gets a commision from them (mostly).
‘Nuff said –C8j
Houska: A diversified portfolio and low-costs are both important. You can’t ignore either of them and hope to be a successful investor.
There is no research backing up the claim that MERs don’t matter and buying a high-MER fund is almost always a bad deal.
could someone explain to me the importance of mutual funds to investors and its classification, and benefits mutual funds offer to investors please.