We all know that, other things being equal, higher MER means
lower returns. But did you know that it also means high risk?
Imagine that you’re a portfolio manager. You’re in charge of a fund
with a 3% MER. Your chief rival is at the helm of a fund with a 1% MER. Because your fees
are higher than your rival’s, you need an extra 2% of returns to reach similar results.
How will you do this? By taking more risk. The table below shows how
funds with a higher MER have, on average, a higher risk (measured by standard deviation).
What the table demonstrates is that if you, as an investor, have a low tolerance
for risk, you should stay away from high cost funds. Do not count on your fund company to
bring this situation to your attention.
Smart investors pay close attention to the connection between risk and
reward. In most cases, high risk means high reward, and vice versa. But
people who invest in high cost funds have the worst of both worlds: they spend more, for
the dubious privilege of having a riskier asset. That does not make much sense.
The following table demonstrates our point: see how, on average, funds with higher cost have a tendency to take on higher risk!
Table III-Canadian equity funds: Relationship between Risk and Cost
| Quartile |
MER |
Average Standard Deviation (3 years) |
| Bottom |
2% |
14.4% |
| Second Last |
2.1% |
17.6% |
| Third Last |
2.2% |
19.1% |
| Bottom |
2.2% |
21.3% |