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Dale Jackson

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Pull the biggest weeds first

Dale Jackson

It's getting tough for the mutual fund industry to stick to its contention that actively managed funds provide a buffer in bad times.

On average, almost every mutual fund category is posting losses as deep as their benchmark index. Some are above average and some are below but the task determining which ones will perform going forward falls somewhere between an exhausting study and a crapshoot. One thing is for certain, though: if you're going to lose money on a mutual fund you should pay as little as possible.

There is no proven correlation between management fees and long-term performance but every dollar paid in fees is one dollar less in returns. The best way to clean out those fee-lugs is to start with the basics — after all, the costly funds that have been dragging down your portfolio in bad times are the ones that will become anchors in good times.

Let's start with Canadian equity funds. Many of the best performing unrestricted Canadian equity funds over the past ten years have management expense ratios (MERs) well below the average 2.4 per cent annual fee. The top performer, Fidelity Canadian Disciplined Canadian Equity-B, currently charges investors 2.19 per cent of total assets invested and has posted an average annual return of 7.1 per cent since 1999.

An even better example is the RBC Canadian Equity fund. Over the past ten years it has returned an average 4.9 per cent annually but only charges investors 1.95 per cent annually.

Inversely, near the bottom of the ten-year list IA Clarington Canadian Growth has lost an average 1.13 per cent annually over the past ten years but charges unit-holders an above average MER of 2.46 per cent.

If you're like many investors waiting out the downturn by putting your cash in money market funds, one normally performs as well as the other. After all, Canadian money market funds are just short term bank and government debt. However, fees vary wildly. Two examples at opposite ends of the spectrum are the Franklin Templeton Money Market — F fund with a ten year average annual return of 3.25 per cent and an MER of 0.53 per cent, and the Acuity Money Market Fund with a ten year average annual return of only 1.53 per cent and a whopping MER of 1.83% per cent — plus a fee, or load, at the point of purchase or sale for the person who sold you the fund.

Canadian fixed income fund performance is in a tight range much like money market funds but the gap between fees is even bigger. For example, investors in the TD Canadian Bond fund over the past ten years were treated with a 5.44 per cent average annual return while only having to pay 1.05 per cent to the manager. Those who held the Investors Government Bond fund, on the other hand, had a 4.53 per cent return on their investment but had to fork over a 1.96 per cent fee each year — plus a load.

Two Canadian equity balanced funds that also seem similar in terms of performance but differ in terms of cost are CIBC Monthly Income, which returned an average 6.96 per cent each year for the past ten years with an MER of 1.4 per cent — and a 6.66 per cent return from Acuity High Income with a 2.37 per cent MER (plus a load). The Acuity fund would have handily outperformed the CIBC fund if it had a matching fee.

U.S. equity funds take the cake for polar opposites. Over the past ten years the RBC O'Shaughnessy U.S. Value fund kept annual average losses to 1.79 per cent and currently charge an annual MER of 1.47 per cent. Over the same period the AGF American Growth Class fund lost 8.1 per cent each year and AGF currently imposes a 2.95 per cent MER.

Investors can compare management fees through mutual fund websites such as globefund.com. It's important to only compare funds in the same asset class because certain types of funds require different expenses. For example, Canadian equity funds costs much less to manage than international equity funds.

In globefund.com, a fund's asset class can be found in the fund profile. For an easy comparison go to the filter and choose all the funds in the asset class. All the MERs can be displayed by clicking "key facts". Click the "MER" button on top once to place them in order of highest to lowest, and twice for lowest to highest. You may be shocked at what you find.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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