Stop Paying Outrageous Fees on Canadian Mutual Funds (Part 1 of 4)


Part 1: Why Mutual Fund Fees are Killing Your Returns

Mr. Thrifty can’t think of any profession, other than investment management, where trained professionals consistently underperform other higher primates……and are rewarded mightily for it. Tony neighborhoods like Forest Hill and the Bridle Path are littered with so-called investment professionals whose main talent is separating you from your hard-earned savings. We’re here to look at Canadian stock market returns as compared to the fees retail investors pay.

How High are Investment Management Fees?

What’s the size of the problem? The Investment Funds Institute of Canada (IFIC) reported that Canadians held $1.5 trillion in long-term mutual funds as of May 31, 2019. And those are just assets held directly.

If you add in pension funds, the Big 8* alone manage roughly $1.5 trillion as well (which amount is estimated to account for two-thirds of Canadian pension assets). [*The Big 8 being CPP, OMERS, Ontario Teachers’, CDP, bcIMC, PSPIB, AIMCo, and HOOPP.]

There is a small element of double counting, as a pension fund can also be invested in mutual funds. However, the majority of their investments are managed and held directly (90% in the case of the CDP). They also invest a substantial amount in non-listed assets such as private equity, real estate, and infrastructure. Since they employ investment analysts directly, investment management costs are embedded in their profit & loss statements.

A third component is life insurance companies. According to OSFI, in Q2 2019 their assets amounted to roughly $1.5 trillion as well.

Based on a typical Management Expense Ratio (MER) of 2% for retail funds and 0.5% for institutional funds, we estimate that Canadian active money managers are sucking out in the order of $50 billion annually from Canadians’ hard-earned savings. 

Repeat After Mr. Thrifty: You’re Fired

Is there a better way? Mr. Thrifty thinks there is. It’s time to fire your active money manager (more to come). 

While, as an individual, you can’t do much about how institutions like pension and insurance funds invest your money (nor the cost thereof), you can take direct action on mutual fund investments you hold directly.

The verdict has been in for decades: index funds outperform actively-managed funds. Canadian stock market returns fit this global pattern. While there are some statistical exceptions to this truth, the odds are not in your favour if you think you can pick a fund that will outperform its relevant index in the long run.

Fake News?

With the notable exception of analysis by certain unbiased personal finance columnists (such as @rcarrick), you rarely find accessible analysis in the popular press (could it be that investment managers advertise heavily in the mainstream press?). But you’re in luck: Mr. Thrifty has done the research for you in the hope that he’s cutting through the marketing messages you constantly hear from asset managers trying to lure you to place your assets with them.

Long-term Returns from the Canadian Stock Market: the Canadian TSX Index

First of all, what are the actual returns seen in the Canadian stock market over the long run? We’re talking a typical retirement time horizon of 10, 25, even 40 years.

Being thrifty, we can find such data for free at Yahoo! Finance. They go back to 1979, which is fine for our purposes. 

So, how did the TSX perform over this period? The yearly results show quite a bit of variability:

Value ofManagement
Value after

So, starting in 1980, your $1,000 would have turned into $7,684. Seems decent on the face of it, but that’s over 39 years. The compound annual rate of return (CAGR) comes out to a paltry 5.37%. 

Now, imagine that you had invested in an actively-managed mutual fund that managed to track the index for all of those 39 years and the MER was 2%. That would mean your net annual return would have been only 3.37%. It’s actually worse than that — the MER has a compounding effect and reduces the value of money available for investment in the market. Even in the unlikely event that your fund matched the index’s return, the MER would have chewed up over 80% of your return!

Don’t Forget the Tax

You know what else would chew up your returns? The Taxman. Figure capital gains tax would shave off another chunk if you actually wanted access to your money.

Taxable capital gains distributions are another source of lost return but are difficult to accurately quantify. Actively managed funds trade stocks more frequently than index funds. As a result, an investor in an actively managed fund will generally have higher annual capital gains distributions and face a higher tax bill even if they do not sell their holdings.

…….and the OAS Clawback

Seniors will have the potential unwelcome surprise of the taxable capital gains triggering a clawback of the OAS benefit.

…….and Inflation

Finally, let’s not forget inflation (the Taxman does). The Bank of Canada has a handy inflation calculator, and you know what it says? $1,000 in 1980 was the equivalent of $3,074 in 2018, or an average of 3% annually over that period.

Adding it all up

So, let’s review the math, assuming you bought an actively-managed fund in 1980 that matched the index, with a 2% annual MER, and you liquidated the investment in 2018:

Net Investment Returns 1980-2018

Amount invested in 1980$1,000.00
Growth in index until 2018$7,683.66
Less investment management fees @ 2% p.a.$4,086.42
Investment value in 2018$3,597.24
Capital gains tax @ 40% marginal rate$519.45
Net after-tax value$3,077.79
Cost of inflation$3,073.73
Net gain$4.06

Do you feel rich?

One element that we haven’t analyzed is the dividends that you would have received over this time period, which would have increased your overall return (even after tax). The historical statistics are not available for free (as far as Mr. Thrifty knows) but the current TSX index yield is roughly 3%. Let’s say, in general, that the dividend yield might offset the effect of inflation over your holding period.

Head’s Your Manager Wins, Tails You Lose

While you’re barely ahead of inflation, guess how your investment manager made out during this time? He or she pocketed a cool $4,086 (pre-tax).

Actually, the imbalance is even greater than that: while your capital was locked in for 39 years, your investment manager gets paid continually, allowing him to fund his lavish lifestyle, market the fund to more retail investors, and……… invest his excess capital in an index fund or ETF!

Lest you think that Mr. Thrifty has chosen an arbitrary time period just because that’s how far back Yahoo! Finance’s free data go, let’s look at other long-term holding periods and see how they stacked up:

39 yrs25 yrs10 yrs
Std Deviation0.1600.1670.132

Decidedly lackluster.

The message is this: there’s not much extra room in the annual returns for the scale of charges being imposed by active money managers. Indeed, you’d probably only break even after you factor in inflation and taxes.

BCE.TO as a Case Study

While we don’t have accurate dividend data for the TSX, we are able to drill down into Bell Canada (BCE.TO), which can be a proxy for the market as a whole. Reliable statistics from Yahoo! Finance are available from 2000, so we analyzed the last 19 years. Here’s a summary:

BCE.TO closing price on the TSX, 2000-2019, adjusted for splits and dividends
July 1, 2000$14.24
July 1, 2019$60.33
Holding period19

Again, on the face of it, 7.89% doesn’t seem too bad. But let’s say that instead of holding BCE.TO directly, you had placed your money in a mutual fund whose sole investment was BCE.TO.

Your investment manager would have stepped in for his 2% annual cut over these years, so you’re down to 5.89%.

And what about inflation? The Bank of Canada inflation calculator pegs annual inflation during those 19 years at 1.94%, so your real return (pre-tax) comes down to 3.95%.

Capital gains tax (at a 40% marginal rate) equates to about 1% per annum during the holding period which brings down your net-net return to about 2.95%. Better than keeping your money in a savings account or in GICs, but not by a huge margin.

But guess who’s making out like a bandit? You’re friendly money manager or ‘advisor’. And, why not? From a money manager’s perspective, it’s great business! But, as the numbers clearly show, this is not generally a win-win scenario. And you are not a winner here. In the BCE.TO case, your investment manager’s compensation amounted to about 2/3rds of the return you earned for actually risking your capital.

Looking Ahead

In Part 2, we’ll look at Canadian stock market returns for index funds vs. actively-managed equity funds.


  1. Well done Mr. Thrifty! Its about time that the truth was told about active management fees.
    You can calculated the “Fee’d Me” ratio- another excellent example of what’s in it for the manager, by dividing the MER by the total return. Thats gives the investor what I call the investment factor- the amount of return you have to give the manager. It should be less than 10. If its more than that you’re being ripped off.

    • Thanks, Doug. We will definitely check out the calculator. We think it’s quasi criminal that fund managers charge these obscene fees when most of them don’t even match the index. Most new money is going into index funds or ETFs but there’s still a huge market of uninformed investors upon which these “financial advisors” prey. Time for more aggressive regulation.

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