Morningstar Magazine - February/March 2015 - 51

EXHIBIT 5

Expense Scores of Selected
Fund Companies

The one that easily comes to mind is that
investors or their advisors prefer cheaper funds.
Low fees are one of the best predictors
of future outperformance, which could explain part
of their popularity.

Fund
Company

Expense
Score

PIMCO

Capital Group

RBC

The second reason could be that fund companies
pass on some of the economies of scale to
their investors by lowering the funds' fees as the
funds get larger.

Scotiabank

Assessing Fee Dispersion Is Important

CIBC

Fidelity

BMO

Franklin Templeton

Mackenzie

AGF

Sentry

Investors Group

In practice, using this framework an investor or
advisor can now assess a fund's MER and
learn how it compares to similar funds in the same
distribution channel. K

Despite the aforementioned trends being strong,
there are notable exceptions. There are cases
especially in the commission-based channel that
expensive funds are notably large-specifically in
the domestic core bond peer group where
30.7% of the assets land in the second most
expensive quintile. This is mainly because of four
large and somewhat expensive funds. The
MERs for Investors Canadian Bond C7, IG
Mackenzie Income C, Investors Fixed Income Flex
Portfolio C, and AGF Canadian Bond range
between 1.82 and 1.85% compared to the 1.55%
average, putting investors in the fund at a
considerable disadvantage.

Source: Morningstar

share class against its category group and
distribution channel peer group. We then take the
asset-weighted percentile ranks for each fund
company. Using the average percentile ranks, we
assign a letter grade to each fund company,
with an A awarded to the least-expensive fund
companies and an F to the most expensive.
E X H I B I T 5 presents the expense scores of selected
fund companies.
From E X H IB IT 5 , we see that at the fund-company
level, the big banks such as BMO, CIBC,
Scotiabank, TD, and RBC (in no particular order)
price their funds competitively. The banks receive
expense scores of A or B. On the other hand, some
independent investment managers with a large
presence in Canada receive lower scores. Firms
such as Sentry and Investors Group receive a D.
There are two reasons that could explain the trend
of a larger level of assets in cheaper funds.

Salman Ahmed, CFA, is a former investment consultant
with Morningstar Associates, Inc. (Canada).
Achilleas Taxildaris is an analyst, active strategies,
manager research, with Morningstar Canada.
Paul D. Kaplan, Ph.D., CFA, is director of research,
Morningstar Canada. He is a member of the editorial board
of Morningstar magazine.

The difference between the most expensive
quintile and the cheapest quintile is about 1% in
most peer groups. If this 1% wasn't already
enough to force investors to examine how the
funds' fees stack up, some groups exhibit
even higher dispersion; for example, the dispersion
between the cheapest and most expensive
domestic noncore equity MER quintiles in the
commission-based channel is 2%.
The Framework to Assess Fees
The CIFSC share-class categorization schema

(now a set of data points in Morningstar Direct) is
a significant development that will help
practitioners perform more meaningful fee
comparisons. The introduction of category groups
that include categories of funds based on
geography and strategy can further improve the
assessment of fees, by putting the whole category
into perspective.

7 Investors Group has closed the series C to new investors and rebates them a part of the fees (up to 50 basis points) that is not reflected on the MER.

global.morningstar.com/Morningstarmagazine

http://global.morningstar.com/Morningstarmagazine

Morningstar Magazine - February/March 2015

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2015