The OSC is taking an interest in high-MERs:
Recently, staff completed a review of investment funds with high management expense ratios (MERs). In selecting our sample, we focussed on investment funds domiciled in Ontario, excluding labour sponsored investment funds due to their different fee structure. We sent letters to seven fund managers, asking questions relating to 11 of their investment funds which, in aggregate, had a net asset value (NAV) of $43.2 million.
Approximately half of the investment funds in our sample were selected because they disclosed MERs in excess of 5%. In our comment letters, we asked the fund managers of these funds to explain the nature and appropriateness of expenses charged to their funds. The average NAV for funds in this category was $3.4 million. These fund managers consistently commented that most fund expenses are fixed and the small size of the investment funds contributed to high MERs. The fund managers are planning to make their funds grow by focussing on marketing and distribution channels going forward, in an effort to increase the fund size and reduce MER. While fixed expenses are higher in proportion to the NAV of new funds, if such funds are not able to demonstrate that they are viable after a reasonable period of time, we would expect fund managers to consider all options available to them in order to improve performance, increase fund size, manage fund costs, achieve efficiencies of scale and, ultimately, reduce MER.
For the other half of our sample, fund managers had absorbed a significant level of expenses in order to present MERs after absorptions consistent with the industry average. We asked the fund managers whether this level of absorption was sustainable and what their plan was to reduce MERs in the future. Consistently, we heard that funds in this category were new funds and each fund manager intended to absorb expenses until their NAV grew to a size associated with an MER that investors would feel is reasonable. While waiving fund expenses is within the rights of fund managers, a pattern of absorbing expenses for many years may set investor expectations. Fund managers should make sure that those expectations are managed appropriately so that investors understand that waivers or absorptions could cease in the future, potentially resulting in a higher MER.
I don’t know which funds they looked at, but did dig out one fund – subsequently closed – with a Management Expense Ratio in excess of 5%:
| Expenses for a High-MER Fund 2009 |
|
| Management fee (note 7) | 66,016 |
| Security holder reporting costs | 77,265 |
| Custodian fee | 15,973 |
| Independent Review Committee fees | 54,070 |
| Legal and filing fees | 34,675 |
| Audit fee | 15,257 |
| Goods and Services Tax | 13,163 |
| 276,419 | |
That was an MER of 5.23%
In 2010, the MER increased to 5.44%:
| Expenses for a High-MER Fund 2010 |
|
| Management fee (note 7) | 65,694 |
| Security holder reporting costs | 77,564 |
| Custodian fee | 16,931 |
| Independent Review Committee fees | 53,609 |
| Legal and filing fees | 33,311 |
| Audit fee | 16,805 |
| Harmonized Sales Tax or Goods and Services Tax | 21,928 |
| 285,842 | |
“Holy Smokes”, I can hear you guys thinking. “The Independent Review Committee made almost as much as the manager! They must have done a lot of work!”.
You silly, gullible people. The IRC report for 2010 states:
Recommendations and Approvals
The Committee made no recommendations or approvals during the Reporting Period.
It’s a regulatory requirement to have an Independent Review Committee; this rule, introduced in mid-2000’s, was enthusiastically supported by Investor Advocates because people who describe themselves as Investor Advocates are basically brain-dead.
As far as I am aware, there has never been a review of the concept to determine whether these things have actually accomplished anything since inception and, if by odd chance they have, whether these things could have been accomplished more cheaply. It would also be interesting to perform a detailed analysis of the other expenses to determine how much of these expenses are incurred simply because of regulation and whether those regulated expenses served any useful purpose. Then, of course, there’s the whole question of inflated prices being charged for simple services by effective monopolies … owned by the banks, but that’s OK because they charge the bank funds the exact same amount! Also, of course, banks get forbearance with respect to the Competition act because they pay a kickback to the regulators. To hire more staff, you know.
But we’ll never see the regulators examining themselves to see if they and their friends should be laid off. And no pressure from the politicians, either.
In other news, the previously announced recession has been cancelled:
The Canadian economy created 42,000 jobs in July – not 200 as mistakenly reported last week by Statistics Canada – as revised numbers beat market expectations.
The unemployment rate declined 0.1 percentage points to 7 per cent.
The release of a revised Labour Force Survey comes after the federal agency took the unprecedented move Tuesday of pulling its monthly Labour Force Survey that had been released last Friday. The agency had said it uncovered an error but had declined to quantify the mistake or offer much of an explanation until Friday morning.
It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets off 1bp and DeemedRetractibles losing 7bp. Volatility was minimal. Volume was pathetically low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3463 % | 2,627.2 |
| FixedFloater | 4.17 % | 3.41 % | 26,001 | 18.58 | 1 | 0.0439 % | 4,158.4 |
| Floater | 2.92 % | 3.05 % | 45,368 | 19.55 | 4 | -0.3463 % | 2,716.7 |
| OpRet | 4.05 % | -3.53 % | 82,573 | 0.08 | 1 | 0.2205 % | 2,727.1 |
| SplitShare | 4.23 % | 3.82 % | 72,023 | 3.96 | 6 | -0.0910 % | 3,135.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2205 % | 2,493.7 |
| Perpetual-Premium | 5.49 % | -3.42 % | 87,001 | 0.08 | 19 | -0.0930 % | 2,435.2 |
| Perpetual-Discount | 5.23 % | 5.20 % | 114,533 | 15.14 | 17 | -0.0302 % | 2,597.2 |
| FixedReset | 4.30 % | 3.58 % | 188,685 | 8.74 | 76 | -0.0123 % | 2,562.9 |
| Deemed-Retractible | 4.98 % | 2.19 % | 106,169 | 0.28 | 42 | -0.0746 % | 2,557.8 |
| FloatingReset | 2.65 % | 1.92 % | 87,394 | 0.16 | 6 | 0.0263 % | 2,523.4 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.X | FixedReset | 1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-15 Maturity Price : 22.17 Evaluated at bid price : 22.57 Bid-YTW : 3.81 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| MFC.PR.M | FixedReset | 849,907 | New issue settled today. YTW SCENARIO Deemed Maturity, 2025-1-31 at 25.00. |
| FTS.PR.K | FixedReset | 35,365 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-15 Maturity Price : 23.17 Evaluated at bid price : 24.92 Bid-YTW : 3.48 % |
| SLF.PR.G | FixedReset | 21,304 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.32 Bid-YTW : 4.33 % |
| ENB.PF.E | FixedReset | 19,038 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-15 Maturity Price : 23.12 Evaluated at bid price : 25.00 Bid-YTW : 4.09 % |
| TD.PF.B | FixedReset | 18,203 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-15 Maturity Price : 23.16 Evaluated at bid price : 24.99 Bid-YTW : 3.61 % |
| BMO.PR.T | FixedReset | 17,500 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-15 Maturity Price : 23.24 Evaluated at bid price : 25.24 Bid-YTW : 3.60 % |
| There were 11 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| PVS.PR.B | SplitShare | Quote: 25.16 – 25.77 Spot Rate : 0.6100 Average : 0.3597 YTW SCENARIO |
| IFC.PR.A | FixedReset | Quote: 24.16 – 24.45 Spot Rate : 0.2900 Average : 0.1888 YTW SCENARIO |
| PVS.PR.C | SplitShare | Quote: 26.13 – 27.13 Spot Rate : 1.0000 Average : 0.9183 YTW SCENARIO |
| TRP.PR.E | FixedReset | Quote: 25.34 – 25.58 Spot Rate : 0.2400 Average : 0.1597 YTW SCENARIO |
| MFC.PR.K | FixedReset | Quote: 24.73 – 24.96 Spot Rate : 0.2300 Average : 0.1602 YTW SCENARIO |
| ENB.PR.Y | FixedReset | Quote: 23.89 – 24.19 Spot Rate : 0.3000 Average : 0.2363 YTW SCENARIO |