I sometimes wonder what it takes to be a reporter for the Globe & Mail these days. This article on MERs by Dale Jackson had an interesting final paragraph:
However, there is a tradeoff when it comes to ETFs versus mutual funds. Investors are exposed to the whim of the broader markets, without the benefit of an experienced portfolio manager to steer clear of danger.
That will be the day, when a portfolio manager of a Canadian equity fund “steers clear of danger.” And how are investors NOT exposed to the “broader markets” when they have the “benefit” of an “experienced portfolio manager.” I have yet to see any convincing evidence that mutual fund managers are capable of beating the passive indexes, after they have taken their expenses. In case you need any examples…
In one of the earlier paragraphs he said:
It’s important to keep in mind that the cheapest funds aren’t necessarily the best funds. The DMP Canadian Value Class fund returned more than 28 per cent last year even after the 4.11 per cent MER was subtracted – nearly doubling the average Canadian equity fund and the TSX. The United-Canadian Equity Value Pool fund, on the other hand, returned less than 10 per cent in 2006.
Way to pick out a return from a single year and talk about it as if it means anything. It also seems to be the only data point he uses to back up his sub-heading “Fund fees can add up. But sometimes, you get what you pay for.” That return is spectacular though and I like value investing. But that is only one year’s return. It will be interesting to see how it does in the coming years. Investing in the best performing funds of the previous year is definitely not a winning strategy.
8 thoughts on “MERs in the Globe & Mail”
It seems to me that most porfolio managers are so concerned with staying close to their index that they might as well be index funds. How many Cdn managers “steered clear” of Nortel in 99/00? If they did they probably lost their jobs because they would have trailed their index by a lot for a couple of years…
Great post! We’ll have to start calling you “the voice of reason”! You’ve exposed very lazy reporting from the GAM guy.
You couldn’t be more right Mike. That’s why I like a guy like Bill Miller. Last year his fund did not beat the S&P 500 for the first time in like 15 years. One of the reasons? He has almost no energy holdings. That’s why he has been able to beat the S&P 500 for so long. He doesn’t chase after Nortels.
I often wonder about what if we compare the more exclusive mutual funds against the passive index. I mean, funds that are available only to accredited investors (ie. the rich).
Some examples include ABC funds by Irwin Michaels and Jarislowsky Fraser funds by the guy who wrote the Investment Zoo. Even PH&N Dividend Income with a relatively low entry minimum has beaten the index pretty consistently over since inception over 30 years ago.
Actually all the exclusive funds that I have ever seen usually do beat the index. I haven’t looked at many, but I can’t recall off the top of my head one that didn’t. I have seen the ABC funds by Irwin Michael, Ross Healy’s funds and a few others and they usually kick the index’s butt.
Using GlobeFund Fundfilter I just compared the 5-year returns of the funds with minimum required investments of $25,000 or greater and there were 20 that beat the index and 11 that didn’t.
If the ones that have been around for 15 years, 7 of them beat the index and 1 didn’t in their 15-year returns.
That’s pretty damn good. I was always planning on investing in ABC Funds eventually (by eventually I mean a long time ago since their minimums are something like $150k per fund). I might have to consider some of these other exclusive funds in the mean time. Or I’ll just stick with the index.
I’m a huge fan of ETF’s over active management myself, but I think your quibbles are a little unfair here. You scoff at the suggestion an active manager could ever steer around danger, but you don’t back that up with evidence either. I’m inherently mistrustful of a lot of money managers and advisers myself, but i don’t doubt that the conservative, good ones exist. I bet the guys that were avoiding Nortel in 1998 because it was too frothy, and who avoided energy from 2003-2005 because it was speculative got crucified for going against the grain at the time. So it only seems fair that we should give them credit when the steering they do genuinely avoids some potholes. Managers who avoid problems should be commended for doing it when they do — even if their fees are occasionally unnecessarily high. Like it’s often siad, any idiot can make money in a bull market. It’s what you do in a bear market that really makes the difference.
Likewise, I agree that chasing last year’s winners is always a losing strategy, but let’s call a spade a spade, here. Anyone who signed up for an exorbitant 4% MER fund last year was expecting to beat the index by quite a bit. And this year, it did. That’s all the article says. That hypothetical person quite literally “got what he paid for” because he beat the index. I suspect he/she won’t in future years, but it seems unfair not to acknowledge when the strategy actually works. THe fund industry’s entire justification for their fees is that if you pay them, they can beat the market for you. Most won’t, but this one did. And again, it’s a small timeframe and offers no guarantee that the trend will be repeated, but the discount fund lagged the index. Occasionally that happens too. 9 times out of 10 I myself would probably buy the fund with the lower MER. But that other time, I’d be ‘wrong’ for doing so in the short term. I don’t really pick up any other inference in the text of thaty sentiment.
I work in the media, so the one final thing i’d say is that it’s exceedingly unlikely that the writer submitted either the head or the sub-head (known as the ‘deck’) for this story. So it wouldn’t be the writer who “backs up his sub-heading” because I’m sure somebody else wrote the display copy. If there was a mistake or overstatement there, I don’t necessarily think it was the writer’s.
“You scoff at the suggestion an active manager could ever steer around danger, but you don’t back that up with evidence either.”
I provided four links to four Canadian equity funds that have sorely underperformed relative to the index in my article. In my search did I find some that did beat the index. I think I found two. As I said “I have yet to see any convincing evidence that mutual fund managers are capable of beating the passive indexes” on average. This isn’t an academic paper and I don’t have the time to find sources. I’m pretty sure I’ve written before about active vs. passive investing. If not, the Canadian Capitalist certainly has.
“That hypothetical person quite literally ‘got what he paid for’ because he beat the index. I suspect he/she won’t in future years, but it seems unfair not to acknowledge when the strategy actually works”
Sorry, what “strategy” are you talking about here? Buying high MER mutual funds and “expecting to beat the index by quite a bit”? What kind of strategy is that? And why should I “acknowledge” something the few times that it “actually works” even if one the whole, that something doesn’t work?
My point on the topic of the high MER fund was that the writer said “It’s important to keep in mind that the cheapest funds aren’t necessarily the best funds.” Then he backs up that statement that some of the best funds are not cheap are the best by talking about one fund, “The DMP Canadian Value Class fund” and it’s return of “more than 28 per cent last year even after the 4.11 per cent MER was subtracted.” He’s implying that DMP Canadian Value Class fund is one of the “best funds” despite its high MER. But he’s only looking at 1 year and 1 fund. Makes great journalism but shitty investment advice, which is what these guys pretend to offer.