Mutual-fund investors must pay attention
Paul Delean, The Gazette
Samedi 18 octobre 2003

DON'T RELY ONLY ON PAST PERFORMANCE

SOME MANAGEMENT-EXPENSE RATIOS ARE SO HIGH, THEY'RE 'A JOKE', FUND MANAGER SAYS

Sébastien LeBlanc, who's been observing mutual-fund investors since he started working for Quebec fund company COTE 100 in 1997, says they tend to fall into two categories: passive and hyperactive.

The hyperactive investor is forever buying, selling and switching, chasing the next wave of returns, usually too late for much upside and often just in time for a slide.

The passive investor buys what the broker recommends and doesn't change a thing until the broker calls - if the broker calls.

" That's a nice, low-maintenance client for the broker to have. They also tend to be at the bottom of their priority list, " said LeBlanc, 30, a former tennis pro (best known as a doubles player with Sébastien Lareau) now heading Clubfin, a division of COTE 100 created two years ago to help mutual-fund investors build and maintain balanced portfolios.

The combination of investor passivity and broker indifference can be costly, LeBlanc said, because diversified portfolios need regular rebalancing - ideally every three to six months.

For instance, an investor who had 20 per cent of a balanced portfolio invested in a tech fund full of Nasdaq stocks in 1996 might have seen its weighting grow to 40 per cent by the spring of 2000 if no tinkering was done. That left the portfolio - and investor - overly exposed to the tech meltdown that followed.

Full-service brokers and self-sufficient investors should be tweaking mutual-fund portfolios regularly to keep them faithful to the investors' risk and asset-allocation profile, LeBlanc said.

He provides Clubfin members with general guidelines through five model portfolios featured in quarterly newsletters or; for those who pay extra, personalised account analysis. There are currently 580 members with $42 million in funds.

Clubfin clients pay $50 a year for their membership. That entitles them to an initial portfolio evaluation, the newsletters and the opportunity to buy and sell about 2,000 funds from most of the major families without any commission or service charges.

The deferred service charge, a financial penalty assessed if investors fail to hold a mutual fund for six or seven years, can run as high as 6 per cent. It's long been a major irritant for consumers.

LeBlanc doesn't like how it locks in investors.

A change in managers - for instance the 2002 departure of Brandes Investment Partners from the highly successful AGF International Value Fund - can fundamentally alter a mutual fund, yet investors who want to exit because of it often get saddled with punitive fees.

LeBlanc said there are other things mutual-fund investors should scrutinize carefully.

One is management expenses. He described as 'a joke' the management-expense ratio of 2.96 per cent borne by the $6.6 billion Investors Dividend fund, when an accomplished fund like Phillips Hager & North Dividend Income gets by with 1.16 per cent.

Investors also should know what their fund contains. The highly rated AIC American Focused fund was 81 per cent invested in cash and short-term securities on Sept. 30, making it more of a money-market than U.S. equity fund.

" It's costing people (2.45 per cent, the annual MER) to have a high percentage of their investment in cash, " LeBlanc said. " This is not right. If you manage your own cash, it will cost you zero. "

LeBlanc is not a fan of the " star system " used to market mutual funds in Canada.

There's a lot more to a fund than past performance, LeBlanc said: volatility, tax-efficiency, risk and management turnover, to name a few of the major considerations.

" Buying mutual funds strictly on past performance is like driving a car looking backward, " he said.

" Going forward, there's a good chance you're going to hit something. "