Canadian costly mutual funds flunk again: only nation of 22 to get an F on fees
Canada's mutual funds again lag the world for their high MERs...
Canada's mutual funds again lag the world for their high MERs, a Morningstar study released Friday says.
An expanded version of a 2009 global study gives Canada a gentleman’s C+ overall but on fees (Management Expense Ratios)
was the only country of 22 to get a failing F. Italy was second worst on fees and expenses with a D.
The study by Morningstar Inc.'s vice president John Rekenthaler and fund analyst Benjamin Alpert did find praiseworthy
things to say about Canada’s fund industry outside the realm of fees: "Sales and media practices are excellent and disclosure
is very good," the authors write, "Unfortunately, these benefits are counterbalanced by steep taxes and the highest fund costs
found in this survey."
Study rebut's IFIC's "apples vs. oranges" excuse
The study includes rebuttals to prior criticisms from the Investment Funds Institute of Canada (IFIC),
which tried to pass off the earlier report as an “apples to oranges” comparison of fees around the world.
IFIC and the industry tried to use the same rationalization to downplay another controversial global study by Harvard's
Peter Tufano and two other finance profs, which came to a similar conclusion as Morningstar. See the Post's early coverage
on that study here. Morningstar still doesn't doesn't buy the "apples vs. oranges" excuse, finding that with "rare exceptions,"
mutual funds in every country pay for distribution costs out of their funds' expense ratios.
IFIC has also blamed high costs on the GST and HST. Morningstar concedes high taxes account for some of the high MERs
but "the source of the costs is immaterial to the fund investor." Many European funds are also subject to value-added taxes,
often much higher than Canada’s GST or HST. Canadian Funds got a D on Regulation and Taxation.
Lower population/economies of scale argument doesn't fly
The study agrees the U.S. market is much larger and so enjoys some economies of scale but adds Canadian fees are
"significantly higher" than such other lower-population countries as Australia, Belgium, Hong Kong, Norway or Sweden.
And they wonder why ETFs are so popular in Canada!
Overall, nine countries beat Canada's C+, including both the U.S. and Singapore with A grades.
Here are the overall grades:
United States: A
United Kingdom: C+
Hong Kong: C
South Africa: C-
New Zealand: D-