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OTTAWA (GlobeinvestorGOLD) — There's a new, frugal you just waiting to take control of your mutual funds.
Yes, frugality is a drag in most aspects of life. But in mutual fund investing, you often get the best results from the cheapest products. Any fall portfolio tune-up should be carried out with this in mind.
Most fund investors have their money in mainstream funds charging fees that must cover the cost of star managers, big research teams, hefty marketing budgets and fees and commissions for financial advisers who sell funds. On a typical big equity fund, you can expect these costs to take about 2.5 percentage points off the gross returns earned by the manager. That's a significant chunk, given that many forecasters see single-digit gains from the stock market in the years ahead.
Clearly, there are advantages to owning a fund that runs lean and thus leaves more of its returns for unitholders. The McLean Budden Canadian Equity Value Fund is a good example. Its management expense ratio — various costs of running the fund measured as a percentage of assets — is 1.25 per cent, about half of what the big, mass-market Canadian equity funds charge on average. The average Canadian equity fund delivered a compound average annual return of 5.5 per cent for the five years to Aug. 30, while McLean Budden Canadian Equity Value averaged 10.2 per cent. The lower MER helped immensely, but that's not the whole story.
Fact is, the people at McLean Budden are darned good at what they do. This is proven by the fact that the company is a major pension fund manager with billions in assets under administration. Funds are a sideline at McLean Budden, a way of squeezing a little extra value out of the research and strategizing done for pension clients. As such, the fund business at McLean Budden isn't marketed much, and advisers receive only token fees for selling it.
This is a business model that you'll find at half a dozen or so fund companies. They're largely institutional money managers, they run funds on the side and they run a lean shop that lets them charge very low fees. Some names to consider in addition to McLean Budden:
Two other low-cost fund families that have achieved superb results would be Saxon and Chou.
As good as many of the funds from these companies are, it doesn't make sense to automatically substitute them for funds you already own. Rather, identify the underperformers in your portfolio and see whether a low-cost alternative is called for. For example, if you've got a mainstream Canadian equity fund that is labouring under a heavy MER, then a fund like McLean Budden Canadian Equity Value might be a good substitute if it meets your objectives.
Don't buy a low-cost fund unless you have the right mindset, though. These funds are often run in such a way as to produce steady, consistent returns that don't spike especially high or low in any given year. More expensive mainstream funds may well outperform low-cost funds in some situations; the benefit of going the low-cost route is that you're in good hands for the long term.
Unfortunately, there are hurdles if you want to go invest in low-cost funds. For one thing, there's usually a high minimum upfront investment that ranges from $5,000 in the case of Mawer to $10,000 in McLean Budden's case to $50,000 at Leith Wheeler. Some advisers will sell these funds, possibly with a small upfront charge, but others shun them altogether because they pay little or nothing in the way of fees and commissions. You can usually buy these funds fairly easily from a discount broker, but there may be sales charged involved. Sales commissions are a pain, but you'll find that you make your money back and then some over the years thanks to the low MERs.
Mainstream funds may be costly in many cases, but they do have some good points. They've got star managers, big research teams and they're widely available because they amply compensate advisers. Of course, you pay for all of that in a way that may not square with the new, frugal you.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.