I. Introduction:
Investors incur a variety of different costs when they invest in mutual funds. The most recognized — and yet not fully appreciated or understood — are the annual costs accounted for by a fund's management expense ratio (MER).Survey Highlights
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The MER is calculated as a percentage of a fund's assets. It is published as an annual figure, but is paid throughout the year, as daily fund prices or NAVPS (net asset values per share) are adjusted to account for costs on an on-going basis.
The MER covers a variety of fund expenses, including management fees paid to the manager of the fund, fund administration expenses, advisor sales commissions and ongoing trailer fees, legal and audit fees, custodian and transfer agent fees, marketing and advertising expenses, and goods and services taxes (GST).
In this survey, we estimate the aggregate value of management expenses paid annually by all unitholders of Canadian mutual funds since 1995. We show how expenses have changed over time both for the average fund and as paid by the average investor. We then focus on the current levels of expenses for various segments of the Canadian fund industry, including differences between mutual funds and segregated funds, and between actively managed mutual funds and index mutual funds. We then report on the variability of expense levels between fund sponsors, showing the fund companies that charge the highest and lowest management expenses.
All of this information is then placed in context by outlining why and how costs matter. The relationship between MERs and fund performance is studied by comparing funds' MERs to their star ratings. The relationship between expenses and performance is also more directly studied by comparing funds' MERs to their returns over the last five years, both in an absolute and risk-adjusted sense.
II. Annual Fund Industry Management Expenses
Investors paid in excess of $10 billion annually on the management expenses of Canadian mutual and segregated funds over each of the last three calendar years and are poised to pay approximately that amount in 2003 as well.
Aggregate management fees paid by investors increased as the Canadian fund industry grew. As the industry's size trebled from about $150 billion in assets under management at the end of 1995 to over $500 billion at the end of 2000, the estimated total management expenses paid by fund investors escalated from about $2.8 billion to over $11 billion. Total management expenses paid by investors declined more recently due to the reduction of assets under management during the bear market for stocks, but remained over $10 billion per year.
Expense increases at the aggregate dollar level were only natural due to industry growth. But expenses have also steadily increased for the average fund. Also, fees paid by the average fund investor have remained higher since the start of the new decade compared with the previous decade. (There is a distinction between MERs for the average fund, which essentially considers all funds in the industry equal irrespective of size, and for the average investor, which is a dollar-weighted statistic, such that it is each dollar invested in the industry that is considered equal.)
The estimated average management expense ratio among all funds has increased in seven of the last eight years, from 2.02% in 1995 to a historical high of 2.62% as of April 30, 2003. Some increase in industry-wide average fund MERs can be explained by the recent growth in the number of segregated funds made available, which, due to their insurance features, typically have higher expense ratios than non-segregated funds. Nonetheless, the average MER among just non-segregated mutual funds has risen in six of the last eight years to its current 2.44% from 2.02% in 1995. Another contributing factor has been the huge growth in the number of funds made available (from about 1,000 in 1995 to over 4,600 currently) because newer funds tend to have to allocate fixed costs over fewer assets. Also, much of the industry's growth was due to the proliferation of specialized or sector funds, which typically cost more to run than traditional core asset class funds. A fourth factor was the introduction of new legislation requiring inclusion of GST in MERs, which typically affected funds' fiscal 2000 year reporting.
The expense ratio paid by the average fund investor has risen as well, though not as significantly as has been the case for the average fund. The expense ratio paid by the average investor (or on the average dollar invested in the fund industry) has increased by about 20 basis points to about 2.13% currently from 1.93% in 1995, after reaching a historical high of 2.16% in 2000.
The trend for management expenses has therefore clearly been upward at the industry aggregate level. The trend has also tended to be upward for individual funds. Though there are examples of economies of scale being achieved with some funds (i.e., expense ratios go down as assets go up), such has been the exception to the rule.
Among those funds with reported MERs as of the end of each of 1998 and 2002, only 12% of them experienced MER reductions over the four-year time horizon, as opposed to 78% that experienced MER increases. This result was independent of changes in asset size. Among those funds with both reported asset bases and reported MERs as at the end of each of 1998 and 2002, of those with assets that went up, 77% also experienced MER increases. That is a virtually identical result to the 80% of funds with decreased asset bases that experienced increased MERs. Similar results were demonstrated for other time periods. For instance, from the end of 1995 to April 2003, 71% of funds have experienced MER increases, including 70% of funds that had higher asset bases.
III. Current Management Expenses for Various Market Segments
Significant variation in expenses exists between different classes of funds, different fund sponsors and different individual funds. The degree of criticality of the cost issue is thus dependent, for each investor, on the particular subset of the fund industry in which the investor is already invested or interested in investing.
Segregated vs. Non-Segregated Fund Management Expenses
A significant growth area of the fund industry in recent years has been the segregated fund market. Segregated funds now account for two out of every five retail investment funds (over 1,800 of the industry's 4,600+ funds). Segregated funds, however, continue to represent a smaller portion of assets under management, accounting for about one out of every 10 dollars invested in the industry (about $46 billion, compared to about $428 billion in mutual funds).
Segregated funds, due in part to the insurance features they include, typically have higher management expense ratios than non-segregated mutual funds. The average MER among segregated funds with reported MERs is 2.90%, versus an average MER of 2.44% for all other funds with reported MERs. The MER on the average dollar invested in segregated funds (among those that have both reported assets and MERs) is 2.76%. That compares to the dollar-weighted average MER of 2.06% among all other funds (with both reported MERs and assets).
Indexed vs. Active Mutual Fund Management Expenses
Index funds represent another distinct segment of the mutual fund market, though one that has not experienced significant sustained growth, despite indications in that direction in the late 1990s. Index funds, including exchange-traded funds (ETFs), account for just one out of every 20 non-segregated mutual funds (140 out of over 2,800 mutual funds), and an even smaller proportion of mutual fund assets ($15 billion, relative to $413 billion in actively managed mutual funds).
Index fund management expenses are significantly lower than expenses charged for actively managed funds. The average MER among index mutual funds is 1.12%, versus an average MER of 2.51% for actively managed mutual funds (among funds with reported MERs). The dollar-weighted average MER among index mutual funds (including ETFs) is 0.69%, versus a dollar-weighted average MER of 2.11% among actively managed mutual funds (with both reported MERs and assets).
Mutual Fund Management Expenses: Fund Sponsors
While the distinctions between segregated funds and mutual funds or between passively and actively managed funds is important, most Canadian fund investors remain interested primarily in conventional mutual funds. In that market segment management expenses vary considerably among fund sponsors.
Canada's largest fund sponsor in terms of mutual fund assets under management is Investors Group. With over $42 billion invested on behalf of unitholders, it is responsible for 10% of all mutual fund assets invested in Canada. Based on assets and management expense ratios as currently reported, Investors Group unitholders pay approximately $1.2 billion in management expenses annually, accounting for about 14% of all annual mutual fund management expenses in Canada.
Conversely, Phillips, Hager & North, which is Canada's 14th largest mutual fund sponsor with almost $10 billion under management, is responsible for 2.3% of all mutual fund assets invested in Canada but for only 0.9% of all annual management expenses paid by Canadian mutual fund investors.
Fund sponsors with at least $1 billion in mutual fund assets under management that have a larger percentage of management expenses paid by investors than a percentage of industry assets under management include Assante, Counsel, Investors Group, Synergy, Primerica, Talvest, Dynamic, AGF, Clarington and Fidelity. Those with at least $1 billion in assets under management that have a smaller percentage of the industry's expenses than a percentage of industry assets include SEI, Barclays, PH&N, Fonds des Professionels, Perigee, MD, McLean Budden, National Bank, CIBC and Scotia.
Note: Number of funds excludes those with unreported MERs; annual fees are estimated as most recently-reported assets multiplied by dollar-weighted average MER; mutual fund assets are as reported, corrected for double-counting across share classes; only sponsors with at least $200 million in assets under management included in top 10 tables; tables also exclude sponsors with assets exclusively or primarily in LSVCs, hedge funds or specialty managed futures and sponsors with funds restricted to affinity groups.
IV. Management Expenses Matter
Fund management expenses and fund performance are inextricably linked — the former impact on management's ability to provide the latter. Fund performance is reported net of fees; that is, after management expenses have been accounted for. Therefore, for any particular level of gross returns, the higher a fund's management expenses, the lower its net performance.
We demonstrate the impact of higher or lower MERs to the investor by studying the relationship between MERs and each of star ratings and fund returns.
Management Expense Ratios and Star Ratings
Funds typically show an inverse relationship between management expense ratios and star ratings. Based on April 30, 2003 data, the average MER among all funds with above-average star ratings (of four or five stars) was 2.30%; the average MER of all funds with average ratings (of three stars) was 2.50%; the average MER of all funds with below-average ratings (of two or one stars) was 2.78%.
Morningstar currently assigns star ratings to funds in 23 fund categories. In 22 categories, the average MER among funds with above-average star ratings was lower than the category-wide average MER. Conversely, in 22 categories the average MER among funds with below-average star ratings was higher than the category-wide average MER. The lone exception in each case was the Science & Technology category.
Management Expense Ratios and Performance
The same inverse relationship is demonstrated between MERs and returns. In each of the six largest fund categories (Canadian Balanced, Canadian Bond, Canadian Equity, Canadian Money Market, Global Equity and U.S. Equity), the average five-year return of funds in the lowest or second lowest MER quintiles was higher than the average return of funds in the highest MER quintile. Conversely, in each of the six categories, the average five-year return of funds in the highest or second highest MER quintiles was lower than the average return of funds in the lowest MER quintile. The same was true for both absolute returns and risk-adjusted returns.
V. Conclusions
This survey provides estimates of the fund management expenses borne by Canadian fund investors, both currently and over the past number of years. Though the degree of precision is limited by inexact reporting of assets and MERs in the fund industry, certain trends and observations are clear.
For more information on mutual fund fees and expenses, click here. (First published June 10, 2003.)
Expense increases at the aggregate dollar level were only natural due to industry growth. But expenses have also steadily increased for the average fund. Also, fees paid by the average fund investor have remained higher since the start of the new decade compared with the previous decade. (There is a distinction between MERs for the average fund, which essentially considers all funds in the industry equal irrespective of size, and for the average investor, which is a dollar-weighted statistic, such that it is each dollar invested in the industry that is considered equal.)
The estimated average management expense ratio among all funds has increased in seven of the last eight years, from 2.02% in 1995 to a historical high of 2.62% as of April 30, 2003. Some increase in industry-wide average fund MERs can be explained by the recent growth in the number of segregated funds made available, which, due to their insurance features, typically have higher expense ratios than non-segregated funds. Nonetheless, the average MER among just non-segregated mutual funds has risen in six of the last eight years to its current 2.44% from 2.02% in 1995. Another contributing factor has been the huge growth in the number of funds made available (from about 1,000 in 1995 to over 4,600 currently) because newer funds tend to have to allocate fixed costs over fewer assets. Also, much of the industry's growth was due to the proliferation of specialized or sector funds, which typically cost more to run than traditional core asset class funds. A fourth factor was the introduction of new legislation requiring inclusion of GST in MERs, which typically affected funds' fiscal 2000 year reporting.
The expense ratio paid by the average fund investor has risen as well, though not as significantly as has been the case for the average fund. The expense ratio paid by the average investor (or on the average dollar invested in the fund industry) has increased by about 20 basis points to about 2.13% currently from 1.93% in 1995, after reaching a historical high of 2.16% in 2000.
The trend for management expenses has therefore clearly been upward at the industry aggregate level. The trend has also tended to be upward for individual funds. Though there are examples of economies of scale being achieved with some funds (i.e., expense ratios go down as assets go up), such has been the exception to the rule.
Among those funds with reported MERs as of the end of each of 1998 and 2002, only 12% of them experienced MER reductions over the four-year time horizon, as opposed to 78% that experienced MER increases. This result was independent of changes in asset size. Among those funds with both reported asset bases and reported MERs as at the end of each of 1998 and 2002, of those with assets that went up, 77% also experienced MER increases. That is a virtually identical result to the 80% of funds with decreased asset bases that experienced increased MERs. Similar results were demonstrated for other time periods. For instance, from the end of 1995 to April 2003, 71% of funds have experienced MER increases, including 70% of funds that had higher asset bases.
III. Current Management Expenses for Various Market Segments
Significant variation in expenses exists between different classes of funds, different fund sponsors and different individual funds. The degree of criticality of the cost issue is thus dependent, for each investor, on the particular subset of the fund industry in which the investor is already invested or interested in investing.
Segregated vs. Non-Segregated Fund Management Expenses
A significant growth area of the fund industry in recent years has been the segregated fund market. Segregated funds now account for two out of every five retail investment funds (over 1,800 of the industry's 4,600+ funds). Segregated funds, however, continue to represent a smaller portion of assets under management, accounting for about one out of every 10 dollars invested in the industry (about $46 billion, compared to about $428 billion in mutual funds).
Segregated funds, due in part to the insurance features they include, typically have higher management expense ratios than non-segregated mutual funds. The average MER among segregated funds with reported MERs is 2.90%, versus an average MER of 2.44% for all other funds with reported MERs. The MER on the average dollar invested in segregated funds (among those that have both reported assets and MERs) is 2.76%. That compares to the dollar-weighted average MER of 2.06% among all other funds (with both reported MERs and assets).
Indexed vs. Active Mutual Fund Management Expenses
Index funds represent another distinct segment of the mutual fund market, though one that has not experienced significant sustained growth, despite indications in that direction in the late 1990s. Index funds, including exchange-traded funds (ETFs), account for just one out of every 20 non-segregated mutual funds (140 out of over 2,800 mutual funds), and an even smaller proportion of mutual fund assets ($15 billion, relative to $413 billion in actively managed mutual funds).
Index fund management expenses are significantly lower than expenses charged for actively managed funds. The average MER among index mutual funds is 1.12%, versus an average MER of 2.51% for actively managed mutual funds (among funds with reported MERs). The dollar-weighted average MER among index mutual funds (including ETFs) is 0.69%, versus a dollar-weighted average MER of 2.11% among actively managed mutual funds (with both reported MERs and assets).
Mutual Fund Management Expenses: Fund Sponsors
While the distinctions between segregated funds and mutual funds or between passively and actively managed funds is important, most Canadian fund investors remain interested primarily in conventional mutual funds. In that market segment management expenses vary considerably among fund sponsors.
Canada's largest fund sponsor in terms of mutual fund assets under management is Investors Group. With over $42 billion invested on behalf of unitholders, it is responsible for 10% of all mutual fund assets invested in Canada. Based on assets and management expense ratios as currently reported, Investors Group unitholders pay approximately $1.2 billion in management expenses annually, accounting for about 14% of all annual mutual fund management expenses in Canada.
Conversely, Phillips, Hager & North, which is Canada's 14th largest mutual fund sponsor with almost $10 billion under management, is responsible for 2.3% of all mutual fund assets invested in Canada but for only 0.9% of all annual management expenses paid by Canadian mutual fund investors.
Fund sponsors with at least $1 billion in mutual fund assets under management that have a larger percentage of management expenses paid by investors than a percentage of industry assets under management include Assante, Counsel, Investors Group, Synergy, Primerica, Talvest, Dynamic, AGF, Clarington and Fidelity. Those with at least $1 billion in assets under management that have a smaller percentage of the industry's expenses than a percentage of industry assets include SEI, Barclays, PH&N, Fonds des Professionels, Perigee, MD, McLean Budden, National Bank, CIBC and Scotia.
| Top 10 Sponsors by Assets | |||||
| Fund Sponsor | # of Funds |
Total Assets ($Mil) |
Avg MER |
$-Wgtd Avg MER |
Est'd Annual Fees |
| Investors Group | 87 | 42,129 | 2.97 | 2.83 | 1,192 |
| RBC Funds | 65 | 36,146 | 2.18 | 1.60 | 579 |
| TD Mutual Funds | 152 | 33,262 | 2.03 | 1.59 | 530 |
| AIM Trimark Investments | 79 | 32,751 | 2.57 | 2.14 | 701 |
| Mackenzie Financial | 122 | 29,860 | 2.64 | 2.39 | 713 |
| CI Mutual Funds | 184 | 29,473 | 2.64 | 2.38 | 701 |
| Fidelity Investments Canada | 63 | 23,032 | 2.57 | 2.43 | 559 |
| AGF Funds | 61 | 21,146 | 2.78 | 2.53 | 536 |
| CIBC Securities | 60 | 19,252 | 2.00 | 1.38 | 266 |
| Franklin Templeton Investments | 84 | 16,511 | 2.40 | 2.31 | 382 |
| Top 10 Sponsors by Estimated Annual Fees | |||||
| Fund Sponsor | # of Funds |
Total Assets ($Mil) |
Avg MER |
$-Wgtd Avg MER |
Est'd Annual Fees |
| Investors Group | 87 | 42,129 | 2.97 | 2.83 | 1,192 |
| Mackenzie Financial | 122 | 29,860 | 2.64 | 2.39 | 713 |
| AIM Trimark Investments | 79 | 32,751 | 2.57 | 2.14 | 701 |
| CI Mutual Funds | 184 | 29,473 | 2.64 | 2.38 | 701 |
| RBC Funds | 65 | 36,146 | 2.18 | 1.60 | 579 |
| Fidelity Investments Canada | 63 | 23,032 | 2.57 | 2.43 | 559 |
| AGF Funds | 61 | 21,146 | 2.78 | 2.53 | 536 |
| TD Mutual Funds | 152 | 33,262 | 2.03 | 1.59 | 530 |
| Franklin Templeton Investments | 84 | 16,511 | 2.40 | 2.31 | 382 |
| AIC | 42 | 11,417 | 2.49 | 2.38 | 271 |
| Top 10 Sponsors by Highest Dollar-Weighted Avg Expense Ratios | |||||
| Fund Sponsor | # of Funds |
Total Assets ($Mil) |
Avg MER |
$-Wgtd Avg MER |
Est'd Annual Fees |
| Sprott Asset Management | 3 | 627 | 7.50 | 5.77 | 36 |
| Assante Asset Management | 31 | 5,983 | 3.00 | 2.95 | 176 |
| Counsel Wealth Management | 19 | 1,245 | 2.94 | 2.88 | 36 |
| Investors Group | 87 | 42,129 | 2.97 | 2.83 | 1,192 |
| Synergy Mutual Funds | 24 | 1,466 | 2.88 | 2.81 | 41 |
| Acuity Funds | 22 | 481 | 2.59 | 2.78 | 13 |
| Cartier Mutual Funds | 14 | 422 | 2.73 | 2.74 | 12 |
| Northwest Mutual Funds | 8 | 500 | 2.65 | 2.69 | 13 |
| Primerica Financial Services | 9 | 1,343 | 2.62 | 2.67 | 36 |
| Brandes Investment Partners | 12 | 605 | 2.58 | 2.67 | 16 |
| Top 10 Sponsors by Lowest Dollar-Weighted Avg Expense Ratios | |||||
| Fund Sponsor | # of Funds |
Total Assets ($Mil) |
Avg MER |
$-Wgtd Avg MER |
Est'd Annual Fees |
| SEI Investments Canada | 23 | 3,237 | 0.99 | 0.20 | 6 |
| Barclays Global Investors Canada | 12 | 5,171 | 0.40 | 0.21 | 11 |
| TD Asset Management | 3 | 222 | 0.35 | 0.28 | 1 |
| Gestion FERIQUE | 6 | 790 | 0.71 | 0.76 | 6 |
| Phillips Hager & North | 20 | 9,588 | 1.02 | 0.84 | 80 |
| Les Fonds D'Investissement FMOQ | 8 | 383 | 0.88 | 0.91 | 3 |
| Perigee Investment Counsel | 14 | 4,186 | 1.19 | 1.07 | 45 |
| Beutel Goodman Managed Funds | 9 | 546 | 1.25 | 1.08 | 6 |
| Leith Wheeler Investment Counsel | 5 | 229 | 1.02 | 1.11 | 3 |
| McLean Budden | 11 | 5,123 | 1.19 | 1.27 | 65 |
| Average MERs by Star Rating | |||||
| Star Ratings | |||||
  |
 |
  |
n/a | all | |
| All Categories | 2.30 | 2.50 | 2.78 | 2.73 | 2.62 |
| Canadian Balanced | 2.31 | 2.45 | 2.81 | 2.63 | 2.55 |
| Canadian Bond | 1.23 | 2.05 | 2.35 | 1.95 | 1.94 |
| Canadian Equity | 2.65 | 2.77 | 2.93 | 2.80 | 2.78 |
| Cdn Money Market | 0.62 | 0.97 | 1.54 | 1.17 | 1.12 |
| Global Equity | 2.78 | 2.72 | 3.09 | 3.00 | 2.93 |
| Science & Tech | 3.08 | 2.95 | 2.86 | 2.88 | 2.92 |
| U.S. Equity | 2.29 | 2.60 | 3.10 | 2.76 | 2.70 |
| Avg 5-Yr Morningstar Risk-Adjusted Return by MER Quintiles | |||||
| MER Quintiles | |||||
| Lowest | Below Avg |
Average | Above Avg |
Highest | |
| Canadian Balanced | -3.3 | -4.7 | -4.5 | -4.2 | -6.8 |
| Canadian Bond | 0.9 | 0.2 | -0.3 | -0.2 | -0.7 |
| Canadian Equity | -6.8 | -8.5 | -8.4 | -8.7 | -10.3 |
| Cdn Money Market | -0.4 | -0.8 | -0.9 | -1.2 | -1.4 |
| Global Equity | -9.4 | -12.0 | -12.3 | -10.7 | -13.7 |
| U.S. Equity | -10.3 | -12.9 | -13.1 | -15.0 | -14.2 |
| Average 5-Yr Return by MER Quintiles | |||||
| MER Quintiles | |||||
| Lowest | Below Avg |
Average | Above Avg |
Highest | |
| Canadian Balanced | 2.0 | 0.3 | 0.6 | 0.9 | -1.4 |
| Canadian Bond | 5.5 | 4.7 | 4.2 | 4.2 | 3.7 |
| Canadian Equity | 0.2 | -1.5 | -1.3 | -1.5 | -2.2 |
| Cdn Money Market | 3.9 | 3.5 | 3.4 | 3.0 | 2.8 |
| Global Equity | -2.9 | -5.5 | -5.7 | -4.1 | -6.2 |
| U.S. Equity | -3.2 | -5.8 | -6.6 | -7.1 | -6.5 |
- Despite tremendous industry growth, investors are generally not receiving the benefits of economies of scale.
- MERs for the average fund have increased significantly over time, even after accounting for the impact of segregated funds.
- The premium paid for segregated fund features in terms of the extra cost of seg funds over mutual funds is significant and points to the need for investors to assess whether the benefits of a seg fund are for them worth the increased costs.
- The premium paid for active management of mutual funds vis-à-vis index funds is significant.
- There are dramatic differences between the levels of fees charged by different fund sponsors.
- Some of the largest fund sponsors, most notably Investors Group, are among the most expensive.
- Funds with higher MERs tend to have lower star ratings and have had worse performance results than those with lower MERs, and vice versa.
- Aggregate expense information for the industry was estimated by applying for each time period the industry's dollar-weighted average MER, calculated from those funds having both reported asset bases and reported MERs, against total industry assets for all funds with reported asset bases.
- Aggregate expense information for each fund sponsor was estimated based only on funds having both reported asset bases and reported MERs.
- Rebates of service fees, to the extent that they exist, were not accounted for.
- MER information has been used as reported to Morningstar. There is significant variability in reporting standards among fund companies.
- Regulatory requirements regarding calculation of MERs were amended in recent years to include GST. The timing of the implementation of the new calculation requirements, typically for 2000, may have varied by fund sponsor, and, in fact, some may continue to report MERs to Morningstar gross of GST.
- This survey is limited to management expenses and therefore does not include other costs borne by investors, such as loads, financial advisory fees paid directly to advisors, trading commissions for ETFs, redemption or switching charges, brokerage commissions on trades made by fund managers and taxes.
For more information on mutual fund fees and expenses, click here. (First published June 10, 2003.)
