coin stacks with letter dice - fees

Canada’s fund industry has crawled out of the basement in Morningstar Inc.’s global rankings of fund investor costs, but remains “below average” due to the impact of high ongoing fees.

The Chicago-based research firm published a report Tuesday that grades the mutual fund investor experience in 26 countries. Canada ranks “below average” in terms of fees and expenses in the report, although this represents an improvement from past years.

According to the report, Canada’s improvement in the study reflects the increased availability of fund share classes without deferred sales charges, reduced trailers, and relatively low upfront sales charges.

“When purchasing funds without advice, investors have found it increasingly possible to invest without paying loads or trailing commissions, or at least a much smaller trailing commission,” it notes.

However, the Canadian industry still rates poorly because asset-weighted median expenses are relatively high.

In particular, Canada has the highest median expenses for asset allocation funds at 1.94%, and is third-highest in the equity category at 1.98%. Fixed-income funds rate a bit better with median expenses of 0.99%.

The report indicates that Canadian investors are increasingly paying for advice separately, but that this trend varies by asset class.

“Considered separately, the asset-weighted medians for share classes sold via commission-based advice come in higher than the overall medians, while the medians for share classes sold via the fee-based advice channel, which includes but is not limited to F-class funds, are substantially lower,” it says.

“While the grade remains held back by asset-weighted medians which are at times highest of all countries in this study, we are encouraged by the unbundling of fees, of which the growth of ‘F class’ shares in Canada is a notable example,” said Christina West, director of manager research services, North America, at Morningstar and co-author of the study.

Australia, the U.S. and the Netherlands top the rankings, “denoting these as the most investor-friendly markets in terms of fees and expenses,” Morningstar says.

The report notes that the U.S. market benefits from scale and competition, whereas Australia and the Netherlands rank highly because “effective regulation has led to high fee transparency in both markets while competition and economies of scale have conferred savings in the Australian market.”

Italy and Taiwan are the only countries ranked in the lowest category, indicating that their fund markets “are characterized by high fees and expenses.”

Morningstar reports that asset-weighted median expense ratios declined in a majority of the 26 markets it surveyed. “The Netherlands saw the largest decline, followed by India and Canada,” it says.

It also finds that, overall, the investor experience, “is improving across multiple markets given lower fees and ease of entry for investors to buy funds without loads or trailing commissions.”

“Since the last study in 2017, we’ve seen fund fees continue to decline across global markets. This reflects a number of key trends including orderly competition, regulatory intervention, and changing practices that have led to the unbundling of advice and sales fees from fund expense ratios in some markets,” said Grant Kennaway, Morningstar’s global practice leader of manager research and co-author of the study.