Understanding MERs - MoneySense

Understanding MERs

If your mutual fund is made up of other mutual funds are you getting charged two different fees? Bruce Sellery has the answer.



I have a mutual fund that holds other mutual funds in its portfolio. Is this fund double dipping on management expenses? Also, I struggle to understand the logic behind a mutual fund holding other mutual funds. It seems like piling on layers of management at additional expense, but with no improvement in performance. What’s your take?


You don’t have to worry about unreported double dipping on management expenses. Even still you should be concerned about the MERs on those funds held within your fund since it could affect performance. Let me explain:

No double dipping, but watch your fund performance

A mutual fund can hold several different assets—stocks, bonds and as you point out, other mutual funds. When a portfolio manager holds another mutual fund, called a sub-fund, the MER that your fund pays on that sub-fund is factored into its performance. Let’s assume your fund manager can choose between two funds that hold exactly the same securities, but have different MERs. For argument sake, let’s say one of those funds has an MER of 3% and the other has a low MER of 1%. The higher MER sub-fund wouldn’t affect the MER you see published, but it would negatively impact the performance of that sub-fund, and therefore your fund.

“The return you get is net of the expenses that your fund pays,” Sukanya Srichandra, statistics manager at The Investment Funds Institute of Canada. “That includes trading costs, and any management expenses associated with a sub-fund.” Said another way, when you pay the MER on your fund, any duplication is eliminated.

Types of funds

You also want to know why a fund company would hold another fund in its portfolio. There are two types of funds that hold other mutual funds and they do so for different reasons.

The first type is called a corporate class fund. In some cases a portfolio manager will hold other funds instead of buying the actual securities because there are tax advantages to do so. Specifically, an investor can move from one corporate class fund to another without triggering capital gains tax. This comes with a cost; The MER on corporate class funds is often about 20 basis points higher than what would be charged on regular funds. But, if you’re an active trader this added cost might make sense.

The second type is called a portfolio fund or a fund of funds. Mutual fund companies offer this product to provide easy diversification. For example, an equity fund that holds a Canadian fund, a U.S. fund and an International fund delivers global diversification very simply. The fees associated with fund of funds can vary greatly.

Too much management, not enough performance?

You also expressed some concern that these types of funds add additional layers of management without improving performance. That may be true, but most of the time the sub-fund doesn’t charge the price it would charge if it was bought and sold on its own. According to Srichandra, when one fund holds another the two companies typically negotiate a discounted fee, which are commonly referred to as Series O funds, or an institutional series fund. High net worth investors are often able to negotiate lower fees in much the same way because of the size of their portfolios. You can find information on the fees in the fund’s management report.

Performance vs. fees

But if the thought of looking at the management report or prospectus makes you want to reach for the bottle then don’t bother looking. I wouldn’t worry so much about whether your fund owns another fund. What I would worry about—and I would worry a lot about this—is how your fund performs against its benchmark index over time.

You can find the performance figures on any of the big mutual fund sites and you simply want to see if it does better or worse than the benchmark over say a five or 10 year period. Some funds with a relatively high MER do well against their benchmark while others don’t. Regardless of the MER, you want a fund that does well. It just so happens that that is easier to do the lower the MER.