Canadian fund fees revisited

By Dan Hallett, CFA, CFP on September 10th, 2010

A few weeks ago, I resurfaced my arguments against concluding that Canadian mutual fund costs exceed those of all other developed countries.  This is turning into one of those perpetual debates.  And while the industry – i.e. IFIC – has rarely been able to mount a unified response to reports of excessive fees in Canada, some individual companies have taken it upon themselves to fight back.

Mackenzie has perhaps been the most vocal of its peers.  Yesterday, Mackenzie released a report it commissioned – prepared by Bain & Company – on a comparison of fund fees in Canada vs. the U.S.  Bain concluded:

“Commonly referenced mutual fund expense ratios do not accurately reflect the relative Cost of Ownership between Canada and the United States. When proper comparisons are made, it becomes clear that mutual fund Cost of Ownership in Canada is very comparable to the U.S. for the majority of Canadian investors”.

Bain’s focus is on those investors who want and need advice.  But their carefully-worded report raises the question:  what’s “comparable”?  A crude analysis suggests that Canadian fund fees exceed the U.S. by 50 to 60 basis points (i.e. 0.50% to 0.60%) annually when equating the trailer (or 12b-1) fee levels but without controlling for GST/HST.  Consider these three examples of identical investment mandates with the same parent-company sponsors.

  • The expense ratio of the Canadian-domiciled Templeton Growth (sold to Canadians) is 0.53% per year more costly than the US-domiciled Templeton Growth (sold to Americans).
  • The Canadian-domiciled Mutual Discovery costs 0.59% per year more than its US-domiciled sibling Mutual Global Discovery.
  • Canadian-domiciled Fidelity Europe costs 0.62% more per year than the US-based Fidelity Europe.

My superficial comparison is more in line with Dr. Karen Ruckman‘s findings.  Ruckman, a business professor at Simon Fraser University, authored Expense ratios of North American mutual funds, published in the February 2003 issue of the Canadian Journal of Economics.  This paper is the cleanest and most objective piece of research I’ve seen on the topic.

Using Morningstar data from the end of 1998, Ruckman found that Canadian-domiciled equity funds were roughly 50% (or 79 basis points) more expensive than US-domiciled equity funds.  She cited six factors to explain the significant difference:

  1. The U.S. mutual fund universe boasts a larger number of low-fee index funds.
  2. A much higher proportion of fund sales in Canada are done on a deferred sales charge basis.  I’d add that lower fees for series of units sold only on a front-end load had disappeared by about 1996.
  3. Trailer fees in Canada are substantially higher than the US-equivalent 12b-1 fees.
  4. U.S. funds’ larger average fund size results in some economies of scale.
  5. Larger fund families in the U.S. provide a larger asset base across which to spread organizational and fund-family-related costs.
  6. A lack of cross-border competition.

When comparing average fees across our respective mutual fund universes, U.S. funds are roughly 1% per year cheaper.  Differences narrow considerably when isolating pure management fees and administrative expenses (as I did above with my three comparisons).  Also, a smaller difference results when zeroing in on specific segments.

Then again, this is all academic as far as I’m concerned.  Investors of all types have plenty of choice to suit their needs.  And Canadian and U.S. mutual fund markets are closed, meaning that residents of one country cannot invest in funds domiciled in the other.  But expect the debate to rage on.