# Defense of MER



## Karlhungus (Oct 4, 2013)

There seems to be a lot of hostility with MER's and rightfully so. My question is, if the fund consistently produces better then expected results, is the MER not justified? Who cares if the MER is 2% if you get 10% each year? Im looking specifically at CI high income signature fund.


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## avrex (Nov 14, 2010)

In my opinion, *A high MER is never justified.*

Past returns are no guarantee of future returns. 

The argument that you present, has been used by others to justify the high cost of mutual funds.

*Argument:* _"The 10 year annualized return beats the index, even after the 2.00% MER is applied. Therefore it must have an all star manger that will continue to outperform."_

*Reality:* It might outperform the benchmark in the future. It might not. No one knows. 
All that I do know is that each year you start at -2.00%.


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## cainvest (May 1, 2013)

Karlhungus said:


> There seems to be a lot of hostility with MER's and rightfully so. My question is, if the fund consistently produces better then expected results, is the MER not justified? Who cares if the MER is 2% if you get 10% each year? Im looking specifically at CI high income signature fund.


I guess the question would be is there an ETF (or lower MER fund) that has a better return with the same holdings as the CI fund?


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## GoldStone (Mar 6, 2011)

The MER of CI High Income Signature Fund is 1.60%. That's actually on the low side by the standards of active Canadian funds.

As far as performance, do you understand where it's coming from? Is it manager's skill? Is it exposure to a hot asset class?

How confident are you that past performance is repeatable? Can you build a similar portfolio at a lower cost?

Hint: this is an income-focused fund. I bet they used to invest in income trusts. If I'm right, part of their past track record comes from the income trusts, the hottest asset class of the last decade.


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## dogcom (May 23, 2009)

Many things can happen here like the manager leaves or makes mistakes. Many corporate bonds here so the fund can hit the skids as the economy drops. However the management could do a great job in the future even if the economy drops. In the end it is still a coin toss if the good performance continues compared to the alternatives.


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## Mookie (Feb 29, 2012)

There's more to an investment than the MER for sure. Just because it has a high MER, doesn't mean it's bad, and just because it has a low MER, doesn't mean it's good. 

One of my best performing investments (over a long period) is a mutual fund with a 2.09% MER. It has consistently outperfomed all of my lowere MER ETFs. I would love to reduce my MER costs, but the bottom line is what really counts.


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## GoldStone (Mar 6, 2011)

Mookie said:


> One of my best performing investments (over a long period) is a mutual fund with a 2.09% MER. It has consistently outperfomed all of my lowere MER ETFs.


That doesn't tell us much. Has it outperformed an appropriate benchmark?


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## brad_g (Apr 12, 2013)

Even Morningstar admits that expenses are a better predictor of future performance than their star ratings. You might have found an exception but will it last going forward?

http://www.morningstar.co.uk/uk/news/66497/how-expense-ratios--star-ratings-predict-success.aspx


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## Potato (Apr 3, 2009)

In a simplistic sense it's a good argument. Basically, the tautology that if you get value for your MER, then you get value that was worth paying for. But: _most _funds don't provide value for the costs, and identifying the winners _in advance_ is difficult if not impossible. There are people out there who can pick jockeys even if they don't know horses, but to my mind if you can develop the skills to see through a funds' intrinsic salesmanship, then you likely have the analytical abilities to just pick stocks yourself.


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## Karlhungus (Oct 4, 2013)

avrex said:


> In my opinion, *A high MER is never justified.*
> 
> Past returns are no guarantee of future returns.
> 
> ...


But with this logic you would never admit that the fund was better. It could outperform for 10 years and you would say, "doesnt mean it will for the next 10". At some point, you have to admit its good despite the MER. Past results are no guarantee but they are the best predictor.


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## MrMatt (Dec 21, 2011)

Mookie said:


> There's more to an investment than the MER for sure. Just because it has a high MER, doesn't mean it's bad, and just because it has a low MER, doesn't mean it's good.
> 
> One of my best performing investments (over a long period) is a mutual fund with a 2.09% MER. It has consistently outperfomed all of my lowere MER ETFs. I would love to reduce my MER costs, but the bottom line is what really counts.


a 2% MER is a high hurdle to overcome.

Several investors like Warren Buffett will manage your money for a near 0% MER.


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## kcowan (Jul 1, 2010)

I think it is a good idea to convert the MER to cash. If you have $10000 invested then you are paying $200 for the portfolio manager, whether the fund goes up of down. If you have $100000 invested, you might find you can get better value investing the $2000 in other ways. But if you can't find those other ways then by all means keep with the mutual fund. Better to stay in the markets even if you are inefficient.


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## GoldStone (Mar 6, 2011)

Karlhungus said:


> Past results are no guarantee but they are the best predictor.


No, past results are not the best predictor. Numerous studies have shown that expense ratio is the best predictor of future long term performance.


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## My Own Advisor (Sep 24, 2012)

I think high-fees, for investment products (such as many mutual funds) are not justified when there are so many other great options available to investors now.

Precisely because you cannot predict the future, you should keep your financial costs as low as possible.


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## MoreMiles (Apr 20, 2011)

Nobody likes to pay fees. But ask yourself if you work for free? Why can a lawyer charge $400 / h to draft wills and plumber $200 per home visit? You can DIY for 90% less, right?

Those who complain are hypocrite! They obviously made some money from others somehow. So they have that spare money to invest... then they frown on other people trying to do the same.


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## donald (Apr 18, 2011)

I don't think it is a problem on a 10k portf moremiles(and nobody is going to argue they are making boatloads and of course they should be paid)
But once you have certain sums invested(and accumulating via divs/and yearly lump sums ect)that mer is not so pretty.
What about a mer on 250k or 500k?


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## richard (Jun 20, 2013)

Many managers are rewarded through high MERs for taking additional risks. If it works they look good, if it doesn't they can cause permanent losses for investors but keep collecting the fees. They can also be rewarded for choosing a benchmark that doesn't really reflect what they're invested in so they look good even if they only got average returns. There are a few funds that are worth the price but they are not many and not easy to find. The things that make a fund good for long-term investors often drive away most clients. That's about all you need to know.


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## richard (Jun 20, 2013)

MoreMiles said:


> Nobody likes to pay fees. But ask yourself if you work for free? Why can a lawyer charge $400 / h to draft wills and plumber $200 per home visit? You can DIY for 90% less, right?
> 
> Those who complain are hypocrite! They obviously made some money from others somehow. So they have that spare money to invest... then they frown on other people trying to do the same.


I've seen lawyers who lost their clients more money than they charged in fees, and a bathroom installer who couldn't match the quality of my first-ever caulking job. With help like that (or the average fund manager) you should complain.


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## Homerhomer (Oct 18, 2010)

My problem with MER is not how much it is, but because it's not based on performance.


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## Synergy (Mar 18, 2013)

A big issue for me is the transparency (fees) and lack of knowledge with regards to low cost alternatives - the average investor. Once people realize that they are paying $30-40+K in fees per year to an advisor that does very little, I'm sure investors will eventually seek alternatives. High fee MF's may eventually become a thing of the past and advisors, planners, institutions, etc. will have to figure out other ways to make thier $.


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## tombiosis (Dec 18, 2010)

homerhomer said:


> my problem with mer is not how much it is, but because it's not based on performance.


exactly!


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## andrewf (Mar 1, 2010)

What about a MF that took as its fee a % (say 25%) of the alpha/excess return over a benchmark with equivalent factor exposure, with credits for periods of underperformance. The problem is that this fund will never exist because MFs can't consistently deliver alpha. Much easier to closet index and shear the sheep who invest in your fund.


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## cainvest (May 1, 2013)

It's easy to attack MER as it's a fixed cost comparison, you know what is being skimmed off. In at least some cases though, it seems pretty trivial when you do a comparison.

Compare these two funds longer term score cards, 1.6 vs 0.35 MER.

TDB677
5yr 17.03 
10yr 4.04

TDB902
5yr 15.86
10yr 4.17


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## Homerhomer (Oct 18, 2010)

andrewf said:


> The problem is that this fund will never exist because * MFs can't consistently deliver alpha.* .


And that's why people have problem with MER ;-)

Hybrid system would work, if there is a period of underperformance charge a minimal fee that would allow the fund to survive, something comparable to mer on etf, and when you do perform charge for it. Good managers would do well if they can outperform the index more often than not.

The issues is that mutual fund sales people (as great as they are) would never offer it to their uneducated clients since the commission wouldn't be worth their time. Unfortunately the current MER have to support way too many people who have actually nothing to do with the performance of the fund, and that's why performance based will never exist ;-)


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## andrewf (Mar 1, 2010)

902 has significant factor tilts. Once you take away the factor tilts (which can be obtained through ETFs very cheaply), are they really creating value?


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## andrewf (Mar 1, 2010)

Homerhomer said:


> And that's why people have problem with MER ;-)
> 
> Hybrid system would work, if there is a period of underperformance charge a minimal fee that would allow the fund to survive, something comparable to mer on etf, and when you do perform charge for it. Good managers would do well if they can outperform the index more often than not.
> 
> The issues is that mutual fund sales people (as great as they are) would never offer it to their uneducated clients since the commission wouldn't be worth their time. Unfortunately the current MER have to support way too many people who have actually nothing to do with the performance of the fund, and that's why performance based will never exist ;-)


That just gives incentive for high volatility. It's the same problem with executive compensation. If they blow up the company, no skin off their back. So they have an incentive to bet the farm and hope for a big win (and a big payday in bonus/vested options). Interests are not aligned with shareholders.


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## GoldStone (Mar 6, 2011)

andrewf said:


> 902 has significant factor tilts. Once you take away the factor tilts (which can be obtained through ETFs very cheaply), are they really creating value?


What factor tilts? 902 is a plain vanilla S&P500 index fund.


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## marina628 (Dec 14, 2010)

I bought TDB645 , TDB225 and TDB652 a couple times last year which charges 2.83 MER but with a 28 -52% ROI I am not complaining.I buy e-series where I can but the sectors I have bought with the high MER.


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## Homerhomer (Oct 18, 2010)

andrewf said:


> That just gives incentive for high volatility. It's the same problem with executive compensation. If they blow up the company, no skin off their back. So they have an incentive to bet the farm and hope for a big win (and a big payday in bonus/vested options). Interests are not aligned with shareholders.


Good point to a point ;-) if they loose huge percentage only to be compensated for huge gain the next period the funds will not flow into the fund since the overall performance will be poor, either way folks are still unhappy with high mer fees so there probably is more justified solution.


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## andrewf (Mar 1, 2010)

GoldStone said:


> What factor tilts? 902 is a plain vanilla S&P500 index fund.


Sorry, I meant 677 (I'm not familiar with all of TD's fund codes).


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## favelle75 (Feb 6, 2013)

avrex said:


> It might outperform the benchmark in the future. It might not. No one knows.
> All that I do know is that each year you start at -2.00%.


Exactly my thoughts.


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## cainvest (May 1, 2013)

andrewf said:


> 902 has significant factor tilts. Once you take away the factor tilts (which can be obtained through ETFs very cheaply), are they really creating value?


I have no idea what the above means and how it relates to a lower MER "always" being better. Bottom line is dollars you're receiving.

An investor could easily choose between TDB677 and TDB902 for US equity exposure and the lower MER is NOT a clear cut winner. If the 1.25% MER advantage was really playing out here TDB902 should be an easy winner but it actually is 1.17% less for the 5yr and is only 0.13% better at 10 years. So all this means is it's a little more complicated than just looking for low MER.


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## andrewf (Mar 1, 2010)

You're basing that on past performance. You can always find active funds that outperformed in the past. That is trivially easy. The trick is finding a fund that will outperform in the future.


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## JordoR (Aug 20, 2013)

I'm kind of facing the same realization when trying to put together a new portfolio for my RRSP. I like the idea of the Global Couch Potato (with modifying the percentages a bit) but have noticed that the E-series funds are underperforming their counterparts whether I look at them on a 1YR, 5YR, or 10YR.

While I like and understand that having a low MER is fantastic because it's less money for fees out of one's pocket, I think I would rather pay a 2.25% MER than a 0.33% MER if it can gain me an extra 5-10% (after the MER deduction of course). I suppose though if we have a year similar to 2008 you would be glad you are paying lower MER's.

In general I agree with the lowest MER's possible, but sometimes it just doesn't seem logical.


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## MoreMiles (Apr 20, 2011)

andrewf said:


> You're basing that on past performance. You can always find active funds that outperformed in the past. That is trivially easy. The trick is finding a fund that will outperform in the future.


This is a myth. Past records do indicate future outcome. They do not guarantee but they can indicte. 

It's like people with poor or good credits, it's a past record right? So why would people still ask to see those old records? Becuase it does tell some story of the underlying person style.

So I don't agree with your view.


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## MRT (Apr 8, 2013)

MoreMiles said:


> This is a myth. Past records do indicate future outcome. They do not guarantee but they can indicte.
> 
> It's like people with poor or good credits, it's a past record right? So why would people still ask to see those old records? Becuase it does tell some story of the underlying person style.
> 
> So I don't agree with your view.


that is a terrible analogy.

A credit score reflects individual human behaviour, and our behaviour tends not to be random. Past behaviour is usually a good predictor of future behaviour. 

The same is not true in finance. Returns are not reflective of individual human behaviour, and past returns have been demonstrated to be a weak predictor of future returns.


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## Woz (Sep 5, 2013)

The bigger issue is how do you show that a fund manager has been outperforming? If you only look at the 1/3/5/10 year returns compared to a benchmark then you’re missing a big part of the picture as the excess returns can often be explained by an increased exposure to certain risk factors or is statistically insignificant. If I were to invest in a higher MER fund then I’d want to see that the fund manager is providing statistically significant alpha.


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## uptoolate (Oct 9, 2011)

GoldStone said:


> No, past results are not the best predictor. Numerous studies have shown that expense ratio is the best predictor of future long term performance.


Just in case anyone missed this: the correlation is inverse. High MER, low performance.


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## cainvest (May 1, 2013)

andrewf said:


> You're basing that on past performance. You can always find active funds that outperformed in the past. That is trivially easy. The trick is finding a fund that will outperform in the future.


Well you can't base a comparison on future performance can you. It's no different than all the news about using low MER index funds, they all use "past performance" to give us statistics that some high percentage don't beat their index right?

I guess the point being having the lowest MER portfolio is not the end all be all of investing IMO, going that route will NOT a "guarantee" it will outperform the higher MER mutual funds you have now. However, it is a controllable expense so if you find a lower MER fund/ETF that does exactly the same thing as one of your current funds, well ... you might as well switch IMO. 

Also, I don't see any trick to "finding a fund that will outperform in the future", they don't exist that I know of. I'm just doing what the majority of people are doing by using past performance (as in stock markets as a whole will continue to rise) to guide my more risky investments.


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## andrewf (Mar 1, 2010)

cainvest said:


> Well you can't base a comparison on future performance can you. It's no different than all the news about using low MER index funds, they all use "past performance" to give us statistics that some high percentage don't beat their index right?
> 
> I guess the point being having the lowest MER portfolio is not the end all be all of investing IMO, going that route will NOT a "guarantee" it will outperform the higher MER mutual funds you have now. However, it is a controllable expense so if you find a lower MER fund/ETF that does exactly the same thing as one of your current funds, well ... you might as well switch IMO.
> 
> Also, I don't see any trick to "finding a fund that will outperform in the future", they don't exist that I know of. I'm just doing what the majority of people are doing by using past performance (as in stock markets as a whole will continue to rise) to guide my more risky investments.


That's a reason to invest in the market, not a reason to pay someone 2% a year for the privilege of doing so. For one active fund to outperform, another one has to underperform. If you combined all the funds together, they would trail the market by the average fee they charge (plus transaction costs). You're counting on your luck/ability to pick a fund that's a winner rather than a loser.


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## KaeJS (Sep 28, 2010)

Stop worrying about MER and start worrying about what you are buying.

It is true that past performance does not guarantee future performance, but it's a pretty damn good indication.

MER's don't matter. What matters is your return.

Focus more on what you're buying and how you think it will perform as opposed to what the fee is.


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## GoldStone (Mar 6, 2011)

^^^ standard sales pitch of a commissioned mutual fund salesman


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## Rusty O'Toole (Feb 1, 2012)

Karlhungus said:


> There seems to be a lot of hostility with MER's and rightfully so. My question is, if the fund consistently produces better then expected results, is the MER not justified? Who cares if the MER is 2% if you get 10% each year? Im looking specifically at CI high income signature fund.


The problem is they don`t. There are many studies proving that there is no correlation between MER and results. If you buy a low cost ETF that mirrors the Dow or S&P you will beat 90% of the funds out there. And of the top 10%, you never see the same names on the list 2 years in a row. The funds that outperform the averages for 10 or 20 years running, can be counted on the fingers of one hand and there is no way to know in advance which will hit the jackpot next.


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## richard (Jun 20, 2013)

JordoR said:


> I'm kind of facing the same realization when trying to put together a new portfolio for my RRSP. I like the idea of the Global Couch Potato (with modifying the percentages a bit) but have noticed that the E-series funds are underperforming their counterparts whether I look at them on a 1YR, 5YR, or 10YR.
> 
> While I like and understand that having a low MER is fantastic because it's less money for fees out of one's pocket, I think I would rather pay a 2.25% MER than a 0.33% MER if it can gain me an extra 5-10% (after the MER deduction of course). I suppose though if we have a year similar to 2008 you would be glad you are paying lower MER's.
> 
> In general I agree with the lowest MER's possible, but sometimes it just doesn't seem logical.


One reason for this is that actively-managed funds that have badly underperformed no longer exist or got merged into a fund that did better. The investors still got terrible returns and paid high fees, but the fund company can pretend it never happened.


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## andrewf (Mar 1, 2010)

KaeJS said:


> Stop worrying about MER and start worrying about what you are buying.
> 
> It is true that past performance does not guarantee future performance, but it's a pretty damn good indication.
> 
> ...


You should really disclose that you work in the industry when making such comments.


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## GoldStone (Mar 6, 2011)

To say that MERs don't matter is to deny the power of compounding. That's akin to denying gravity.


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## Sasquatch (Jan 28, 2012)

Funny how folks get all bent out of shape over MERs.
To me paying the MER on a MF is the cost of doing business by allowing me the freedom of not worrying about my investment by watching it like a hawk 3 times a day and panicking when it drops. I'll leave that to a so-called pro who knows what he is doing (hopefully).
Some folks, who will fight over every .1 % of MER have no problem blowing $ 800.- on a brake job or god knows how much to have a new toilet or water heater installed by so- called pros. I do all this mundane stuff myself because I enjoy it and I know what I'm doing and saving a bundle in the process. In the end it boils down to what your priorities are.
I guess I could've saved some MER fees over the years but I think I more than made up for it by being an avid DIY'er and saving a sh*tload of money there.


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## cainvest (May 1, 2013)

GoldStone said:


> To say that MERs don't matter is to deny the power of compounding. That's akin to denying gravity.


Very true but it would be nice to see some data to back up how much one is "really" losing. 
What's a good mutual fund library website nowadays to see the returns on say, the S&P500 related funds?


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## Synergy (Mar 18, 2013)

KaeJS said:


> MER's don't matter. What matters is your return. Focus more on what you're buying and how you think it will perform as opposed to what the fee is.


That's bad advice in my opinion.

Quoting a past article by CC



> While the returns advertised by mutual funds already account for the MER, investors should still pay attention to how much fees they are paying because a higher MER does not mean a better product. In fact, many studies have demonstrated the opposite: the lower a fund’s fee, the better its odds of posting future returns that are better than average. As John Bogle likes to say: “in mutual funds you don’t get what you pay for. You get what you don’t pay for”.


http://www.canadiancapitalist.com/the-importance-of-mutual-fund-mers/


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## GoldStone (Mar 6, 2011)

cainvest said:


> Very true but it would be nice to see some data to back up how much one is "really" losing.


Just play with a MER calculator.

http://www.begintoinvest.com/expense-ratio-calculator/

Do 0.2% vs 2% for 30 years as a start.


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## cainvest (May 1, 2013)

GoldStone said:


> Just play with a MER calculator.
> 
> http://www.begintoinvest.com/expense-ratio-calculator/
> 
> Do 0.2% vs 2% for 30 years as a start.


But that assumes all returns being equal, I'd like to see the actual 3,5 and 10 year returns on the funds/ETFs.
And yes, I understand compounding ...


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## GoldStone (Mar 6, 2011)

cainvest said:


> But that assumes all returns being equal, I'd like to see the actual 3,5 and 10 year returns on the funds/ETFs.


Google SPIVA Scorecard by S&P Dow Jones. It's an annual report that compares active fund performance to passive indexes. They do separate reports for US and Canada.

ADDED: here they are

http://ca.spindices.com/resource-center/thought-leadership/spiva/


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## cainvest (May 1, 2013)

GoldStone said:


> Google SPIVA Scorecard by S&P Dow Jones. It's an annual report that compares active fund performance to passive indexes. They do separate reports for US and Canada.
> 
> ADDED: here they are
> 
> http://ca.spindices.com/resource-center/thought-leadership/spiva/


Not what I was looking for but some interesting data there, especially with nearly 3 out of 4 active funds beating the S&P/TSX Composite Index.
Thanks for the interesting read though!


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## GoldStone (Mar 6, 2011)

cainvest said:


> Not what I was looking for but some interesting data there, especially with nearly 3 out of 4 active funds beating the S&P/TSX Composite Index.


You found that encouraging?

72% after 1 year.
45% after 3 years.
30% after 5 years.

Note how quick the drop off is. 

25 years? Active funds don't stand a chance. High fees are like a lead balloon.


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## uptoolate (Oct 9, 2011)

Also outperformance tends to be by a relatively small amount while underperformance tends to be a larger amount. Again, increasing as time goes on. Also, performance numbers are boosted by survivorship bias as time goes by and the nursery phenomenon where many small funds are started and only ones with good numbers are brought to market. I'll take my chances with 0.05 for VTI, 0.14 for VXUS and 0.10 for VCE. IMO, the fact that Canadian MF's have been repeatedly singled out for being the most expensive in any Western country makes it a pretty easy decision.


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## dogcom (May 23, 2009)

Higher MER's in specialty funds could be worth their money where it is much harder for the average investor to invest in like small caps here or internationally.


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## Synergy (Mar 18, 2013)

SPIVA S&P Canada 2013



> There are no consistent or useful trends to be found
> in annual active versus index figures. The only
> consistent data point we have observed over a five-
> year horizon is that a majority of active equity
> ...


Not positive information IMO.


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## cainvest (May 1, 2013)

GoldStone said:


> You found that encouraging?
> 
> 72% after 1 year.
> 45% after 3 years.
> ...


lol, no not encouraging ... rather surprising! I would have guessed less than 50% for even the 1 year mark. 

BTW, do they have a report like this for ETFs?


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## GoldStone (Mar 6, 2011)

cainvest said:


> BTW, do they have a report like this for ETFs?


No. What's the point?

ETFs passively track their respective indexes. You can look up the tracking error for each ETF.


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## cainvest (May 1, 2013)

GoldStone said:


> No. What's the point?
> 
> ETFs passively track their respective indexes. You can look up the tracking error for each ETF.


Just would have been nice to see all in one place. So ETF returns (for the same index obviously) are basically all within a 1% of each other then?


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## andrewf (Mar 1, 2010)

Sasquatch said:


> Funny how folks get all bent out of shape over MERs.
> To me paying the MER on a MF is the cost of doing business by allowing me the freedom of not worrying about my investment by watching it like a hawk 3 times a day and panicking when it drops. I'll leave that to a so-called pro who knows what he is doing (hopefully).
> Some folks, who will fight over every .1 % of MER have no problem blowing $ 800.- on a brake job or god knows how much to have a new toilet or water heater installed by so- called pros. I do all this mundane stuff myself because I enjoy it and I know what I'm doing and saving a bundle in the process. In the end it boils down to what your priorities are.
> I guess I could've saved some MER fees over the years but I think I more than made up for it by being an avid DIY'er and saving a sh*tload of money there.


Have you done the math of the difference between a 0.5% MER and a 2.5% MER? It's pretty incredible how much of a difference it makes.

For an illustration, check out this blog post: http://www.michaeljamesonmoney.com/2009/12/mer-drag-on-returns-in-pictures.html


















Avoiding paying high MERs is some of the easiest money you can ever save. Compare it to changing your own oil every 3 months....


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## christinad (Apr 30, 2013)

An interesting thread to read. I've been torn between the e series and the Mawer funds. I'm still inclined to choose Mawer Canadian Equity over cnd index e even with all the naysayers. I guess we all want to be winners. I'll take my spiva 30% odds that it will be one of the ones that will beat the index.


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## andrewf (Mar 1, 2010)

Mawer at least tends to have low MERs for managed funds. But paying in excess of 2% for a closet index fund (like most big bank MF offerings) is just plain wasteful.


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## GoldStone (Mar 6, 2011)

cainvest said:


> So ETF returns (for the same index obviously) are basically all within a 1% of each other then?


Of course.


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## Potato (Apr 3, 2009)

cainvest said:


> lol, no not encouraging ... rather surprising! I would have guessed less than 50% for even the 1 year mark.


There's more noise in the 1-year results. Most other years it is well under 50% that out-perform after a year.
2013: 73% [mid-year report]
2012: 41%
2011: 27%
2010: 20%


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## Mookie (Feb 29, 2012)

andrewf said:


> The trick is finding a fund that will outperform in the future.


When someone definitively solves that problem, let me know.


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## james4beach (Nov 15, 2012)

Sasquatch said:


> To me paying the MER on a MF is the cost of doing business by allowing me the freedom of not worrying about my investment


Hilarious!!

Hey let me tell you about the cost of doing business. iShares does it with XIU and BMO does it with ZCN. The cost of doing business is 0.17% MER.

Zero point one seven percent

Or less, for many American ETFs like IVV (the S&P 500) at 0.09%

I hate to break it to you (if you've been happily paying 2% MERs all these years) but the only necessary cost of being exposed to the stock market is in the ballpark of 0.1% to 0.2% MER

And that's very much a set-it-and-forget it price. That's _all_ it costs! Now if you're happy paying an order of magnitude higher comissions, go ahead, but personally I think that's a stupid thing to do.

I don't know what you think the higher MER funds are doing for you. You want to not worry about your investments? Reduce your stock exposure and put more in GICs. I mean this isn't rocket science, there is no reason to pay anyone more than 0.5% MER


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## KaeJS (Sep 28, 2010)

A lot of people disagreeing with me.

Honestly, though. MER and return are not really linked.

You cannot say for certain a high MER means poor performance or vice versa.

The fee you pay and the return you receive are separate.

You can have an MER of 2% and a return of 6%. You can also have an MER of 2% and a return of 12%.

Unless the fund you buy is underperforming similar funds with lower MER's or the benchmark, you've got no reason to worry.

Some MF's beat ETFs, benchmarks. Some do not. 

I personally wouldn't want to invest in Mutual Funds OR ETFs.

The truth is that buying Dividend Fund A with MER of 1.5% is not guaranteed to return more than Dividend Fund B with MER of 2% unless they are identical funds.

So, what does it matter if your MER is a bit higher or lower? It doesn't signify anything.

Look at the following for year 2013:

TD Dividend Growth, MER 2.03, RETURN 16.97%

BMO Dividend Fund, MER 1.57, RETURN 17.92%

Scotia Canadian Dividend, MER 1.71, RETURN 18.11%

XIC ETF, MER 0.27, RETURN 12.71%

XIU ETF, MER 0.18%, RETURN 13.03%

TSX: 9.6%

There's no correlation.

TD has the highest MER and lowest return, but still beat the TSX, XIU and XIC.

Scotia has the highest return but the MER is in the middle.

BMO has the lowest MER of the funds but didn't beat Scotia.

All funds beat the TSX which is the comparable benchmark.

If you bought based on MER only, you wouldn't have got the best return. Therefore, I stress the point that MER is not a huge concern between similar funds.

What you buy is more important than how much you pay.


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## richard (Jun 20, 2013)

Kae, if you buy a lottery ticket I can't guarantee that you will lose either. I just have enough statistics to tell me that the hope is a lot stronger than the reality with lotteries and expensive funds.


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## GoldStone (Mar 6, 2011)

KaeJS said:


> Look at the following for year 2013:
> 
> ...
> 
> There's no correlation.


One year. 5 hand picked funds. You are calling no correlations. That's hilarious. You need to take a basic statistics course.


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## andrewf (Mar 1, 2010)

KaeJS said:


> Honestly, though. MER and return are not really linked.
> [...]
> The fee you pay and the return you receive are separate.
> I personally wouldn't want to invest in Mutual Funds OR ETFs.
> ...


Kae, you really need to understand statistics before you start throwing out such unsubstantiated claims. And not just 'How to lie with statistics'.

For instance, you compared dividend focused MFs with cap-weighted ETFs. Let's see what happens when you add Canadian dividend ETFs:

XDV - Dow Jones Canada Select Dividend Index Fund -- MER 0.55, 2013 performance: 18.98%
VDY - FTSE Canadian High Dividend Yield Index ETF -- MER 0.30%, 2013 performance: 20.32%

What was that about MERs having no correlation to returns? Besides, cherry picked data points used to illustrate a point has absolutely no proving power. You could have just mashed the keyboard and made as convincing an argument.

Honestly, I'm disappointed in you.


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## brad_g (Apr 12, 2013)

KaeJS said:


> There's no correlation.


That's just not supported by the data. Morningstar did a popular analysis on this a few years back:

http://news.morningstar.com/articlenet/article.aspx?id=347327



> Conclusion
> Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.


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## GoldStone (Mar 6, 2011)

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” -- Upton Sinclair

His salary, or his trailing commissions.


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## cainvest (May 1, 2013)

I also wonder how similar those funds/etfs (other then what the name implies) really are? Sure they say Canadian but I bet a number of them have a significant US component to them.

BTW, out of curiosity, is the amount tracking error on XDV common or more of an exception?


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## GoldStone (Mar 6, 2011)

cainvest said:


> BTW, out of curiosity, is the amount tracking error on XDV common or more of an exception?


Are you referring to XDV underperforming VDY? It's not a tracking error. They track two different indexes.


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## cainvest (May 1, 2013)

GoldStone said:


> Are you referring to XDV underperforming VDY? It's not a tracking error. They track two different indexes.


No comparison, just peaked at their tracking chart for XDV, seems to be moving off their index but I'm not sure if that's a normal amount.


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## GoldStone (Mar 6, 2011)

0.81% tracking error after 5 years. 0.55% MER + taxes + trading expenses. Sounds about right.

The tracking chart shows the power of compounding. 

Compound 0.81% for 5 years, it adds up.


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## cainvest (May 1, 2013)

GoldStone said:


> The tracking chart shows the power of compounding.


Never really looked at the tracking errors before but just looking at the chart (not the best for this) it would seem its more than just compounding over time. It appears, to some degree, that the recent volatility (mid 2013 and on) has caused an increase in tracking error. I would guess that makes sense though, more volatility = more tracking error.


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## KaeJS (Sep 28, 2010)

andrewf said:


> Kae, you really need to understand statistics before you start throwing out such unsubstantiated claims. And not just 'How to lie with statistics'.
> 
> For instance, you compared dividend focused MFs with cap-weighted ETFs. Let's see what happens when you add Canadian dividend ETFs:
> 
> ...


You are correct.

Specifically, though, the OP was asking about Mutual Fund MER's.

I stated that what is more important than the MER is what you are buying. I think there may be some confusion in what I was trying to prove. I understand that XDV is a more comparable option to the MF's I posted than say, XIU or XIC. I was trying to reinforce my point that what is more important than the MER is which investment you purchase. I also provided the TSX return, which is full of resource companies that wouldn't normally be included in Dividend Funds.

I'm not disputing that XDV performed better and has a lower MER. That is a fact.

But there are other issues that come into play as well. If you are buying ETF's in a lump sum, then that is one thing. But you cannot DCA an ETF cost-free as you can with a MF.

By no means am I saying MER doesn't ever matter, but in the case of purchasing like mutual funds between institutions, it's literally anyone's game. Purchasing an ETF compared to a MF is a different story altogether as they are not the same product.

The OP's question was: "If the fund consistently produces better than expected results, is the MER not justified?"

If that is the case, then the answer is Yes, the MER is justified. In which case, it's more important to focus on what you are buying (which could mean an ETF, or self-directed stocks, options, etc).


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## andrewf (Mar 1, 2010)

KaeJS said:


> I stated that what is more important than the MER is what you are buying. I think there may be some confusion in what I was trying to prove. I understand that XDV is a more comparable option to the MF's I posted than say, XIU or XIC. I was trying to reinforce my point that what is more important than the MER is which investment you purchase. I also provided the TSX return, which is full of resource companies that wouldn't normally be included in Dividend Funds.


Yes, you should be considering asset allocation first. But once you decide on asset allocation, cost to implement that allocation is important.



> But there are other issues that come into play as well. If you are buying ETF's in a lump sum, then that is one thing. But you cannot DCA an ETF cost-free as you can with a MF.


But it's not cost-free with a MF. You're paying 2% of AUM in real dollars.



> The OP's question was: "If the fund consistently produces better than expected results, is the MER not justified?"
> 
> If that is the case, then the answer is Yes, the MER is justified. In which case, it's more important to focus on what you are buying (which could mean an ETF, or self-directed stocks, options, etc).


But that question presumes that it is knowable in advance which funds will outperform. There is no evidence to support this premise, and plenty to contradict it.


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## Karlhungus (Oct 4, 2013)

Interesting discussion on this thread. Like Kae said, if i would be happy with 7% from my investments, yet the one fund that I pay a 1.6% MER consistently gives me 10%, would I not be satisfied?


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## cainvest (May 1, 2013)

Karlhungus said:


> yet the one fund that I pay a 1.6% MER consistently gives me 10%, would I not be satisfied?


So would you happier if there was a lower MER fund or etf (with basically the same holdings as your current fund) that gave you 11%?


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## Karlhungus (Oct 4, 2013)

cainvest said:


> So would you happier if there was a lower MER fund or etf (with basically the same holdings as your current fund) that gave you 11%?


Well part of the reason i mention CI high income is that there is 25% turnover so I am assuming that the manager of the fund is picking stocks/funds better then the average person. Hence the good track record and 5 star rating. If it was just a collection of stocks then yes, i would agree with you.


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## avrex (Nov 14, 2010)

The 5 star rating is awarded solely based on 'past performance'.

We cannot assume that the future performance, exceeding the benchmark, will continue.


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## cainvest (May 1, 2013)

Karlhungus said:


> Well part of the reason i mention CI high income is that there is 25% turnover so I am assuming that the manager of the fund is picking stocks/funds better then the average person. Hence the good track record and 5 star rating. If it was just a collection of stocks then yes, i would agree with you.


It is mostly a collection of stocks (High on financial and energy) and ~44% Corporate Bonds. You can always look up the changes they've made over the years for that fund, might help you decide if there is a different fund/etf that would net you better returns.


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## KaeJS (Sep 28, 2010)

Karlhungus said:


> Well part of the reason i mention CI high income is that there is 25% turnover so I am assuming that the manager of the fund is picking stocks/funds better then the average person. Hence the good track record and 5 star rating. If it was just a collection of stocks then yes, i would agree with you.


25% turnover could be a bad thing.

You shouldn't assume that manager knows what they are doing. But it is a possibility.


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## andrewf (Mar 1, 2010)

25% turnover is actually pretty passive. A lot of passive equity funds have turnovers of 10% due to corporate actions (mergers, etc.), changes to the index, etc.


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## cainvest (May 1, 2013)

So I ran into this senario yesterday, discussing on a person's US portion of their portfolio. They are not self-directed, and do not want to be, so they have no ETF options. So on the mutual fund side they put on the table RBF557 (0.72 MER) and RBF552 (1.55 MER). Obviously past performance came into play with the higher MER fund making better returns, looking at it from a 10 year window, so how do you justify (if you do) to them to switch to a pure index fund with lower returns?


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## andrewf (Mar 1, 2010)

Wait until the fund has a ten year return lagging the index? It will happen.


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## christinad (Apr 30, 2013)

Its interesting. Mawer Canadian equity was beating the index for 10 years I think. Now it is lagging the index. You just don't know. That is why i may buy half index e and half mawer canadian. At least i'll be half right.


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## GoldStone (Mar 6, 2011)

cainvest said:


> how do you justify (if you do) to them to switch to a pure index fund with lower returns?


Maybe you don't. MER difference is less than 1%.

RBF552 - O'Shaughnessy U.S. Value Fund

James O'Shaughnessy wrote a classic book, What Works on Wall Street. IMO, his quantitative value strategy may be able to generate alpha in excess of 1%. The strategy picks the stocks based strictly on their value characteristics. No human judgement is involved in picking stocks. In that sense, it's not really an active fund.

Too bad that person wouldn't consider ETFs. You can buy ETFs that pursue similar strategies at a much lower cost.


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## GoldStone (Mar 6, 2011)

christinad said:


> Now it is lagging the index.


How long is "now"?

Gold stocks have had a very strong start this year, after dropping something like 50% last year. Mawer doesn't own gold stocks. That might explain the performance lag this year.

Short term performance is noise. You should ignore it.


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## cainvest (May 1, 2013)

GoldStone said:


> Maybe you don't. MER difference is less than 1%.
> 
> RBF552 - O'Shaughnessy U.S. Value Fund
> 
> ...


I worked on the self-directed thing for a while now but they really don't like the self management. Which ETFs do you know of mirror the O'Shaughnessy U.S.Value ... might help me sway them a bit. 

BTW, when are the different series of mutual funds available to investors? I ask because the D series of this fund is .25 MER lower.


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## heyjude (May 16, 2009)

cainvest said:


> So I ran into this senario yesterday, discussing on a person's US portion of their portfolio. They are not self-directed, and do not want to be, so they have no ETF options. So on the mutual fund side they put on the table RBF557 (0.72 MER) and RBF552 (1.55 MER). Obviously past performance came into play with the higher MER fund making better returns, looking at it from a 10 year window, so how do you justify (if you do) to them to switch to a pure index fund with lower returns?


Well, you could track a shadow index fund and provide them with comparative updates on returns after fees on an annual basis. Over time, the penny might drop.


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## GoldStone (Mar 6, 2011)

cainvest said:


> Which ETFs do you know of mirror the O'Shaughnessy U.S.Value


None. I don't think they exist. O'Shaughnessy runs his own asset management shop. He doesn't want to share the secret sauce with the ETF competitors. I'm not sure why he licensed the strategy to RBC, but that was a long time ago.

When I mentioned similar strategies, I was thinking about smart beta ETFs: fundamental indexing, equal weight indexing, etc.



cainvest said:


> BTW, when are the different series of mutual funds available to investors? I ask because the D series of this fund is .25 MER lower.


The D series are available at RBC Direct Investing. I think it's the only place to buy them.


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## Brian Weatherdon CFP (Jan 18, 2011)

Karlhungus said:


> ...hostility with MER's ...


Karl I agree with you, yet the positions taken can be rather dogmatic in nature. Here's the thing and we could use mutual funds specifically as an example. A particular firm offers a global small-business fund with a MER near 2.8% and a global micro-cap fund with a MER near 3.6%. Which would you choose for global small/micro exposure? Or do you toss both funds for an INTL Index EFT with MER nearer 0.6. Yet the broader exposure and diversification of the above funds can prove valuable. Indeed the micro-cap fund has considerably out-performed the lower-MER fund. ... Ultimately, deciding which product to choose, or how you want to build a portfolio overall, becomes a personal matter and investor-fit.

PS: I don't believe it has been mentioned above ... for higher wealth deposits the MER discussion is a much tighter decision because fund-fees can be significantly discounted, whereas ETFs are not packaged in a manner that allows further discounting. At higher wealth levels the all-in costs of mutual or segregated funds on the one side, and ETFs on the other, can become insignificant. 

BW


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## avrex (Nov 14, 2010)

Brian Weatherdon CFP said:


> I don't believe it has been mentioned above ... for higher wealth deposits the MER discussion is a much tighter decision because fund-fees can be significantly discounted, whereas ETFs are not packaged in a manner that allows further discounting. At higher wealth levels the all-in costs of mutual or segregated funds on the one side, and ETFs on the other, can become insignificant.


I'm not sure if I understand the above correctly. Can you provide an example?


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## richard (Jun 20, 2013)

cainvest said:


> So I ran into this senario yesterday, discussing on a person's US portion of their portfolio. They are not self-directed, and do not want to be, so they have no ETF options. So on the mutual fund side they put on the table RBF557 (0.72 MER) and RBF552 (1.55 MER). Obviously past performance came into play with the higher MER fund making better returns, looking at it from a 10 year window, so how do you justify (if you do) to them to switch to a pure index fund with lower returns?


You could tell them that out of thousands of funds, the ones that have done better in the past (even for 10 years) often don't have a higher chance of doing better than the index or even the average fund (which we will remember does not do better than the index) in the future. You could tell them that most fund managers will do whatever they can to increase the fees they earn even if it lowers investor returns (like letting the fund grow too big). But if they just like the active fund they will most likely invest in that.

Question though, if they aren't self-directed what kind of advice are they getting on funds? Are they still picking that themselves?


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## cainvest (May 1, 2013)

richard said:


> You could tell them that out of thousands of funds, the ones that have done better in the past (even for 10 years) often don't have a higher chance of doing better than the index or even the average fund (which we will remember does not do better than the index) in the future. You could tell them that most fund managers will do whatever they can to increase the fees they earn even if it lowers investor returns (like letting the fund grow too big). But if they just like the active fund they will most likely invest in that.


Already explained the "odds" of a fund getting better than index returns, tough sell on moving when they cashed in fairly well over the past 10 years on the active fund. 



richard said:


> Question though, if they aren't self-directed what kind of advice are they getting on funds? Are they still picking that themselves?


Advice is now coming from CFP/FA, current portfolio was setup by a different FA. The current guy did not push high MER funds, actually wants to change a few funds to reduce it and also explained how much money the current MER was costing the portfolio. I sat in on this meeting BTW and the advice I heard was good overall however, like all bank related CFP/FA people, he seemed pretty "boxed in" to a specific set of ideas.


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## My Own Advisor (Sep 24, 2012)

I suspect it's all about framing...

Tell someone they are paying 2% fees and they probably say that's not too bad. 

Tell the same person they are paying a few thousand in fees every year and see what the reaction is. 

Tell the same person yet again they could likely get the same returns, and save a few thousand in fees and watch for another reaction.

I had to repeat this process with my parents (in their 60s) no less than 5 times on 5 different occasions to let that concept sink in. They are finally making some changes.


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## Pluto (Sep 12, 2013)

JordoR said:


> I'm kind of facing the same realization when trying to put together a new portfolio for my RRSP. I like the idea of the Global Couch Potato (with modifying the percentages a bit) but have noticed that the E-series funds are underperforming their counterparts whether I look at them on a 1YR, 5YR, or 10YR.
> 
> While I like and understand that having a low MER is fantastic because it's less money for fees out of one's pocket, I think I would rather pay a 2.25% MER than a 0.33% MER if it can gain me an extra 5-10% (after the MER deduction of course). I suppose though if we have a year similar to 2008 you would be glad you are paying lower MER's.
> 
> In general I agree with the lowest MER's possible, but sometimes it just doesn't seem logical.


Since you mention 2008, if one had e- series funds, and a margin account, and bought more on margin in 2008-9 then got off margin with in about 2 years, you would likely out perform the high mer funds. Most of the easy money is made right at the beginning of a new bull market. It's the safest time to be on margin.


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## cainvest (May 1, 2013)

My Own Advisor said:


> I suspect it's all about framing...
> 
> Tell someone they are paying 2% fees and they probably say that's not too bad.
> 
> ...


All those points were in the meeting, % plus $ amount compared to index fund % plus $ amount. Also the difference in total returns over 10 years with the higher MER fund being ~15% better. It's hard to convey "likely get the same return" when the history is showing the opposite.


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## richard (Jun 20, 2013)

There is an endless list of funds, strategies, and trends that have done well for a while and then done very poorly after that. My favorite example is Bill Miller. If you look up a few of those it might help give it some more weight.

I'm just in the middle of John Bogle's Common Sense on Mutual Funds now. It's pretty long but he takes apart every angle and leaves no question that the funds that are actually worth more than an index MER are extremely rare.

This fund's size seems to be into the danger zone at $1.7B. Can you find out how much it's grown over the last 10 years? Most funds have better returns when they are smaller.

The current fund turnover is 60%. Does the strategy of picking long-term value stocks fit with the idea of throwing out 60% of those selections every year? This creates trading costs that aren't included in the MER, and if it's in a taxable account it creates more taxes.

It also seems to generally be more volatile than the index, which means that you could get the same level of risk by buying the index with leverage and quite possibly higher returns.


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## cainvest (May 1, 2013)

The fund size appears to have more than doubled since 2005, mainly due to different series of funds being added. 
TER is currently sitting at 0.07% and they have no taxable accounts.

Maybe I'll try the approach to split their US side, move only half to the broad US index fund.


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## CanadianCapitalist (Mar 31, 2009)

Brian Weatherdon CFP said:


> At higher wealth levels the all-in costs of mutual or segregated funds on the one side, and ETFs on the other, can become insignificant.
> BW


That's really really hard to believe. Example?


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## hboy43 (May 10, 2009)

richard said:


> It also seems to generally be more volatile than the index, which means that you could get the same level of risk by buying the index with leverage and quite possibly higher returns.


This is a conclusion I reached too. I 80% stick with old large caps like banks and utilities, big energy etc. and leverage. I figure this in the long run should do about as well as the return on small caps which is purported to be about 3 percentage points higher than large cap, without any work on my part exploring all kinds of new businesses, technologies and principle people.

hboy43


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