Monday 7 February 2011

Mutual Fund MERs - Can You Get Even?

We all know the old saying "don't get mad, get even". There has been a lot of justified complaining about high mutual fund expenses in Canada. It so happens that a number of the companies that charge those high fees - all the big banks and insurance companies amongst them - are public companies whose shares we can buy. Presumably those high fees go into the coffers of those companies. So should we investors simply invest in those mutual fund sellers to get our own back and make decent returns?

The answer appears to be yes for some and no for others.

Yes - Royal Bank of Canada (RY) vs RBC Canadian Dividend (RBF266), a flagship mega fund with $10.4 billion in assets
The chart shows that over the past ten years the price of RY has risen a lot more than RBF266 (even excluding dividends, which are sure to have been higher for RY than RBF266). It is also interesting, and perhaps significant since RBF266's MER at 1.7% is appreciably less than the typical 2+% equity mutual fund MER, that RBF266 outpaced the TSX Composite by a good margin. The entry for RBF266, which includes all dividends/distributions in Total Return figures, confirms that fact - 10-year performance was 8.16% annualized vs only 1.64% for the TSX. An RBC Investor Deck shows total returns for RY to Dec.1st, 2010 at 13.0%.

IGM Financial (IGM) vs Investors Group Dividend A or C (IGI008), another mega fund with $13.5 billion in assets. Here's another chart from Over the past ten years IGM seems to have easily outstripped INI008, which has not even done as well as the TSX Composite (the blue line). Perhaps the 2.78% MER of INI008 has something to do with that?

No, or perhaps more precisely, it's hard to tell which will lose you more money - Matrix Asset Management (MTA) vs GrowthWorks Canadian (WVN612)
It seems to be a choice between the long, slow, steady slide into oblivion of WVN612 (see this chart - even the highly volatile TSX Small Cap Index has eventually recovered and is up) vs the yet-to-be revealed hazards of MTA.

The chart above doesn't tell the whole story of WVN612's sorry life. Prior to 2005, it was the Capital Alliance Venture fund, which led an equally horrible life (Returns for CAVI to November 29, 2005 were: 1 yr: -7.7%; 3 yr: -9.8%; 5 yr: -13.8%; since inception: -1.3% per bottom of page 4). It's funny that CAVI founder and longtime president Denzil Doyle was inducted into the Order of Canada in the same year - 2005 - that the failing fund was sold to GrowthWorks. Disclosure: I invested money in CAVI way back in the 1990s and am a disgruntled loser!

Now MTA manages WVN612 along with a whole collection of similar Labour Sponsored Investment Funds (see Globe and Mail's How Risky is an (sic) LSIF?). Though the funds lose money, the management company doesn't need to, since it draws juicy fees e.g. WVN612's MER is currently 4.96% per annum. That should mean juicy profits for MTA, right? Um, no, MTA has eeked out losses or small profits since its reincarnation on the TSX in January last year after spending years as Seamark. (see the Google Finance chart below of how successful Seamark was for investors)

MTA's stock price is down 9.3% from its initial price, though hey, it is ahead of WVN612 which has lost 14.7% in that time.

What is going on at MTA then? It is hard to tell without spending a lot of time in the financial statements. However, I would be worried that the individuals who manage MTA, the executives, having milked the LSIFs (which is why those failures have been kept alive), will garner most of the benefit from the public company, all perfectly legally no doubt. Various worrying signs are visible - transactions with related parties, extra non-GAAP figures like recurring income before taxes in the income statement to more favourably portray company results. Pass me my ten-foot pole please!

The world is never simple.

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