Judging MERs

Q – I have a question about management expense ratios. What should be the maximum management expense ratio that a fairly small investor, with an eye for medium to long-term growth, should consider? Would this vary between different types of mutual funds, i.e. should I consider higher MERs for growth funds as opposed to dividend income funds? I’ve heard that the MER should be no more than 1.25%. Is that true? I’ve noticed that many MERs are well above this. – D.Z.

A – There is no “maximum” MER, beyond which a fund should be avoided. It’s a matter of reasonableness and the quality of management you’re getting.

For example, virtually all labour-sponsored funds have very high MERs, which is in part due to some special reporting requirements placed upon them by securities regulators. That does not mean, however, that no one should ever buy a labour fund.

MERs do vary according to the type of fund, with money market funds at the lowest level. I consider any money fund with an MER of more than 1% to be expensive.

The Globe and Mail publishes the average MERs for every fund category in its monthly mutual funreview. You can refer to that to see if a fund you’re considering has an MER that is high or low, or about average.

If a fund has a high MER, take a look at its record. If it has consistently outperformed over time, you may decide the extra fee is worth it. No fund should ever be purchased on the basis of MER alone. – G.P.