Archive for Investing

What you pay in Mutual Fund Fees

Mutual Fund Fees

Management expense ratio (MER)

All mutual funds and exchange traded funds (ETFs) charge their shareholders a management expense ratio to cover the fund’s total annual operating expenses. This can include costs such as administrative, compliance, distribution, management, marketing, shareholder services, record-keeping fees and other costs.

You can expect to pay in Canada

Equity mutual funds is 2.35%-2.5% for actively managed funds.
Low cost ETFs 0.06% and for the fancy Hybrid ETFs up to 0.85%.
Index funds MER 0.33% up to 0.72%

What this means for a $100 000 portfolio

Mutual funds
$2,350-2,500 per year
$60-$850 per year
Index investor
$330-$720 per year

Mutual Funds Fees

In 2016, the number of Canadian mutual funds that focused on US stocks that outperformed the index was zero. Investors in these funds are still paying the full MER. Remember, the average management expense ratio in Canada is 2.53%
It is important to note that all rates of return are published net of fees. For example, if the fund shows a 10% return, it actually earned 12.50% but the MER was removed already. You will never see this fee as it is taken off the fund usually on a monthly basis.

Front end load

This fee comes right off your investment. For example, if you are investing $10,000 and you pay a front-end fee of 2%, you will pay $200 for the purchase and $9800 will get invested. Paying a front-end fee means you have less money at work.

Back end load

A back end load is different in that you do not have to pay anything up front. You still pay the MER usually monthly. However, the mutual fund company has locked you into a 6, 7, or 8 year time frame where, if you leave their company before a certain time, you will have to pay a penalty for leaving early. The longer you stay with the fund company, the smaller the fee. Typically, you can still move your funds around within the same company without triggering fees.

Final Thoughts

As you can see MER can make a significant difference to your portfolio performance over the years. With ETF investing there is a cost per trade and that can add up to significant dollars especially with a small portfolio or if you do monthly contributions. Index funds work well for investors with smaller accounts (under $100,000) since you do not have to pay transaction fees per trade and can easily make small monthly contributions.
Some would argue, that for the 2.5% fee you are getting financial/tax advice from professionals, and that is fine as long as you understand what fees you are paying.

Don’t wait for retirement to enjoy life !!

How does one of the top 10 pension funds diversify their assets ?

Canadian Pension Plan

The Canadian-Pension-Plan is in the top 10 largest pension funds in the world. All individuals over the age of 18 who work inside of Canada are eligible to contribute toward and receive benefits from the Canadian Pension Plan (CPP). In 2019 there are changes coming to the CPP to gradually enhance the pension  Canada Pension Plan enhancement.

CPP Asset Allocation

Being one of the worlds largest funds, it’s sole mandate is to invest the assets of the CPP Fund with a view to achieving a maximum rate of return without undue risk of loss. This distinguishes CPP from a sovereign wealth fund that are swayed by political agendas.

The CPP has 320 billion in assets and according to the Chief Actuary forward looking numbers it is sustainable for a 75 year period and that is estimating inflation at 3.9%.

Source: CPP performance

The CPP asset allocation As of March 31, 2017.

Fund Size: $316.7B Asset Mix:

55.4% Equity; 21.5% Fixed Income; 23.1% Real Assets

Canadian Equity: 3.3%
US/EAFE Equity: 27.9%
Emerging  Equity: 5.7%
Private Equity: 18.5%
Fixed/Plus/Global Bonds/Mortgages/Credit: 21.5%
Real Estate: 12.6%


Rate of return

1 year (2017) 11.8%
5 year 11.8%
10 year 6.7%


Final Thoughts

Notice Canadian equity is 3.3%. In my opinion this is acceptably considering Canadian stock market cap is only 2,360 bn.
Most Canadian investors have a home bias and if you live, work, bank, invest, own a business, and hold your assets  in just one country , you are putting all of your eggs in one basket.

As a Canadian for your own long-term portfolio you might want to consider a similar asset allocation. After all, these funds are faced with the pressure of providing millions of people with a secure retirement now and decades into the future.


Don’t wait for retirement to enjoy life !!