For mutual funds, MER coverage is key

Mutual funds should be looked at as long-term investments, and so consistently high MER coverage over three, five and ten years is best.

With all our other investment choices, be it stocks or trusts or bonds or cash, we all make our own decisions on what and when to buy and sell. Not so with mutual funds.

With mutual funds, we as growth and income investors pay someone else to make the security selection and market timing decisions. For that reason, we at the Money Reporter place special emphasis on how much we pay for that professional management, and how much we get back in return.

We could assess the performance of our list of recommended mutual funds by simply comparing the net asset value, or NAV, at the end of 2019 with the corresponding figure at the end of 2018, or we could use the performance measures that the funds supply us with.

Use our MER coverage calculation

But we go further than that. We compare the per cent return we got with the per cent in fees that we had to give up to get that return.

We do this through a performance measure called management expense ratio, or MER, coverage. MER coverage compares how much the investor made relative to how much the fund charges in fees.

For example, if a fund charges an outrageous MER of five per cent per year, we don’t really care as long as the fund makes, say, a 50 per cent return in a year. That would be a one-year MER coverage of 10, indicating that we made ten times as much money as we paid in fees. We’d prefer that to a fund that charges, say, a one per cent MER and makes a two per cent one-year return, for a one-year MER coverage of two times.

Index funds have highest MER coverages

The Money Reporter provides the one-, three-, five- and ten-year MER coverages based on the compounded returns for those periods, to see which funds have been more efficient at producing returns not only in the short term, but over longer periods as well.

On that basis, all of our choices made more than they charged in the last 12 months, thanks to the strong stock market recovery of 2019. As usual, our two index offerings—iShares S&P/TSX 60 Index and TD US Index-e—had the highest MER coverages, thanks to their low fees.

Ultimately, mutual funds should be looked at as long-term investments, and so consistently high MER coverage over three, five and ten years is best.

This is an edited version of an article that was originally published for subscribers in the January 3, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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