#7 Costs. What You Can't See Can Hurt You
When it comes to investing, many investors are not fully aware of all the costs they are directly and indirectly paying. We all have heard of the advantages of compounding, but unfortunately when it comes to costs, compounding can work against you. This is because many of these costs occur annually and destroy wealth in your portfolio that can otherwise be working for you. At Mawer Investment Management Ltd., we are as concerned as you are about costs, because our personal investing policy encourages our portfolio managers to buy Mawer Mutual Funds as well. So we want our money to grow as much as you do! Where does your advisor have their money invested?
In the investment industry one of the most common of these costs is the Management Expense Ratio (MER) on mutual funds. However, some investors are not aware of the impact a lower MER can have over a long period of time. If you were to pay an MER of 1% less on your $500,000 portfolio, you could save $300,000 in fees over a 20-year period (based on a 7% return). Could you use that? At Mawer, the MER on our balanced and equity funds averages more than 1% below the industry average.
Many fund providers would have you believe that higher MERs are justified due to their funds' superior returns. However, Mawer's funds rank among the best in performance in each of their asset classes. Typically higher fees are used to pay for increased advertising and distribution, not for obtaining higher returns. At Mawer, we largely rely on referrals for our business and do limited advertising, so more of your money is working for you, not paying to ask others to come invest with you!
In addition to the higher MER you see at other fund providers, there is often a sales charge or "load" that you pay when you either buy or sell their funds. These sales charges are not reflected in their posted rates of return. As a result, the rates of return for "load" companies would be lower if they were forced to incorporate the sales charges they ask their investors to pay. These sales charges come into effect because investors often buy their funds through brokers or "middlemen" who do not work for the Fund Company. The Mawer Mutual Funds are "no load" funds. Investors are not charged any fees outside of the management expense ratio. This is because, when you invest in Mawer Funds, you are investing directly with the manufacturer and not through middlemen that need to be compensated for their efforts.
An indirect fee that investors often fail to take into account is the tax on fund distributions comprised of capital gains, dividends, and interest. Capital gains are generated by trading activity within the funds. Taxes must be paid on all three types of these distributions. These tend to be higher for many fund companies as they do not pay attention to the tax consequences that their trading activity causes for taxable investors. In fact since posted rates of returns are pre-tax, investors are not aware of the after-tax rates of return. At Mawer, the concerns of our taxable investors are paramount, so much so that we developed an independent investment strategy called TEAM (Tax Effective Asset Management), just for them.
If you would like to learn more about how we manage money, please contact our office toll-free at (888) 549-6248, and ask to speak to a Portfolio Manager, or email us for an information package.