mutual fund

Introduction

In our initial commentary we described the following 13 different types of expenses, fees and other costs (to simplify our wording, we sometimes simply refer to these as either costs or expenses) which mutual fund investors are hit with.

Category 1- MER
A-Fees actually charged to the fund by its manager for management services
B-Marketing fees charged to the fund by its manager
C-Fund manager expenses charged to the fund as part of the management fee.
Category 2- non-MER MER expenses
D-Other operational expenses of the fund
E-Soft dollar expenses
Category 3- other fund fees
F- Other fees
G-Annual fees above and beyond fund manager fees
Category 4- Mutual fund shenanigans
H-Fund manager shenanigans
Category 5- Transaction or turnover-related costs
I- Fund brokerage commissions, 
J-Impact trading costs 
K-Capital gains taxes
Category 6- load fees
L-Purchase/redemption (deferred sales charge) fees
Category 7- Risk premium
M- Additional fund risk beyond a fund’s benchmark index

So what is a reasonable estimate of how much these costs represent as a percentage of amounts invested in mutual funds?

Two caveats

First, two caveats:

We are not aiming for 100% accuracy (in fact, a number of the expenses cannot be quantified at all), but for numbers which will give investors an order of magnitude feel for expense levels of equity mutual funds. Any comments pointing to sources of better estimates are welcome.
Secondly, we are looking at average numbers across the fund industry. Costs of any particular fund can and do vary substantially. Some funds are no-load (no fee or commission on purchase or redemption), others not; some pay marketing fees (called trailer fees in Canada), which are included in and therefore increase reported MER levels, others do not; some are actively managed with higher MER levels than those of passively-managed index funds; and some incur costs to hedge against foreign exchange risk, but most do not .

We begin with regular, taxable investment accounts. For our estimates of costs for the average equity mutual fund we use various sources, and in particular the international comparative mutual fund study by Khorana et al (doc.797) and books by John Bogle (Common Sense on Mutual funds, 2010 p. 363; see also p. 25, 35,107,363,431) and David Swensen (Unconventionnal Success: a fundamental approach to personal investment 2005, p.266).