The best mutual fund companies you probably never heard of

The best mutual fund companies you’ve never heard of

A handful of independent investment firms offer well-regarded actively managed mutual funds, at a fraction of the cost of the big-name providers. But are they better value than index funds?

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It’s a sad fact Canadians are still saddled with some of the world’s most expensive mutual fund fees, even though several lesser-known independent fund companies provide quality active management at a reasonably low cost. Part of the problem is that Canadians place so much trust in the dominant and publicly owned banks, insurance companies and mutual fund companies, that they overlook or are unaware of the other options.

Unfortunately, that trust may be misplaced. Any look at the SPIVA statistics shows that (as of mid-2019) the vast majority of actively managed mutual funds are still hard-pressed to beat their market benchmarks by a margin great enough to overcome the hurdle of the fees they charge. Indeed, the weighted average Management Expense Ratio (MER)—the fees paid to cover a fund’s administrative and operating costs—continues to hover near 2%, which includes an embedded trailer fee to compensate financial advisors for their services and advice. Even as advisors switch to passively managed ETF portfolios, they will still charge 1% or more for their services.

All those embedded fees and commissions also help support extensive advertising campaigns and/or dealer incentive programs that turn these expensive fund companies into household names. The flip side is that the few independent mutual fund companies that eschew embedded commissions and charge considerably less—up to half as much in fees than the big guys — may not even be on your radar. That’s because they seldom advertise, and your commission-compensated advisor (and sometimes discount brokerage) is unlikely to offer or recommend funds that pay them little to nothing in trailer fees.

“Mutual funds get a bad reputation from investor advocates like me, but they should not all be painted with the same criminally expensive brush,” says Robb Engen, the the fee-for-service advisor behind the Boomer & Echo blog.


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Four leading lower-fee mutual fund companies

So, what are these elusive independent lower-fee firms that provide top-rated actively managed mutual funds?  There are four names that consistently come up in interviews with industry observers: Mawer, Leith Wheeler, Beutel Goodman, and Steadyhand.

“These are all pretty good shops that are first and foremost investment managers,” says one fund analyst who requested anonymity.

“I’d pick a few funds from [each of] those companies, blend them with some ETFs and voila: a good cheap portfolio with good outperformance potential,” says another industry veteran.

Despite the lack of marketing, the reputation of firms like these does filter down to retail investors through word of mouth from happy friends and family. And, as the embedded-compensation model continues to lose ground, these lesser-known firms are increasingly being recommended by fee-based advisors.

Below is a rundown on each of these four firms’ offerings, as well as a couple of other better-known options also worth considering.

Mawer

Pundits are taking note of Calgary-based Mawer Investment Management Ltd., with its apt tagline: Be boring. Make money. “My top choice among fund companies is Mawer,” says Gordon Pape, who pioneered Canadian mutual fund guides, citing its “combination of great results, excellent management, and low fees that’s unmatched in the mutual fund industry.”

Founded in 1974 by Charles Mawer (since deceased), the firm runs both individual and institutional money. According to Mawer investment counselor David Fraser, all the big bank discount brokerage operations (except RBC) sell its funds — although the banks are hardly incentivized to do so since none of Mawer’s funds pay trailer fees.

Investors who want to go direct with Mawer need $1 million in investment money to access its discretionary platform. The cost is the MER of the underlying Mawer funds: various combinations of 13 funds. Fixed-income and balanced funds come in just under 1%, equities are 1.1% for Canadian stocks and 1.15% for U.S. stocks, with the highest fees being 1.74% for global small-cap.

Fees taper down as assets rise: to a flat 1% at $2 million, to 0.7% for the subsequent $3 million, to just 0.5% for an additional $5 million. (Note that these fees aren’t comparable to an MER if they exclude administration costs and taxes like the HST). Beyond that, fees tier down to 0.3%. Smaller investors can buy Mawer’s standard retail Series A mutual funds (with a $5,000 minimum purchase) from discount brokers, and they can purchase Series F funds through its partnership with Manulife.

According to experts, Mawer’s performance track record speaks for itself. “I think that’s a mark of being different than the index and keeping costs reasonable (under 1%),” says Engen. He points to Mawer Balanced Fund, which his site once compared to the popular new Vanguard Balanced Asset Allocation Fund (VBAL/TSX), as a fund that has done “extraordinarily well” for the past three decades. But he isn’t sure how much of that success comes from skill and how much is attributable to other factors. “We don’t know what the returns of the next three decades will be,” he says. “A fund that’s outperformed for so long might find itself underperforming for the next decade or more as their strategy falls out of favour.”

Leith Wheeler

Like Mawer, Leith Wheeler targets both individuals and institutional investors. It also sells F-class funds to fee-based investment advisors. Its tagline is “Quiet Money,” explaining in a backgrounder that “loud, brash self-promotion just isn’t our style as it doesn’t seem to serve our clients.”

Discretionary service at Leith Wheeler is available to private clients with a minimum of $500,000 to invest. Self-directed investors can buy its Series B no-load funds directly (with a minimum of $25,000), or Series F through fee-based advisors or certain discount or full-service brokers (with at least $5,000). While its direct no-load business does not use F-class funds, Leith Wheeler F-class funds are available through intermediaries, in the same manner that Mackenzie and other big embedded-commission companies sell their F-class funds. There are seven fixed-income funds, nine equity, and two balanced funds.

Since Leith Wheeler and Mawer are focused on the high-net-worth investor and institutional space, they’re less inclined to promote themselves to smaller individuals. “They’re not flashy or big giant money managers,” says one industry observer. “Each has a well-staffed investment team with a well-defined well-articulated investment strategy. You know what you’re getting; over time that consistent investment process leads to above-average returns. That’s amplified even more with their lower fees.”

Beutel Goodman

Another popular choice is Beutel Goodman Investment Counsel, established in 1967, which is 49% owned by AMG Canada and 51% by Beutel employees. This firm is another pick from Pape: “They have several high-quality funds, at reasonable MERs.”

You’ll need $1 million for its discretionary private client service, but 17 mutual funds are available through advisors or discount brokerages, at a minimum purchase of $5,000 each. Class F funds are for fee-based accounts with no trailers paid; Class B have trailers of 0.5 or 1% payable to advisors. Class D funds are for DIY investors but pay the discount brokerages small (0.1% to 0.25%) trailers.

Steadyhand

Individual investors may also consider Vancouver-based Steadyhand Investment Funds Inc. Its lineage flows from another firm that at one time regularly made the list of stellar non-trailing commission shops: Phillips, Hager & North Ltd. (PH&N), which Pape used to recommend highly in his annual guides. “They still have some good quality funds but they certainly are no longer a small boutique house,” he says.

Other sources became less than effusive in their praise of PH&N after it was acquired by the Royal Bank in 2008. In fact, one competitor says a lot of investors flocked to its firm after RBC acquired PH&N: “I know clients were generally unhappy about it and averse to big banks, even if nothing changed.” PH&N clients pay 40 basis points for service on top of the F-class MERs.

Steadyhand’s founder is ex-PH&N executive Tom Bradley, who launched the firm in 2006, two years before the RBC deal. Portfolio manager Salman Ahmed says Steadyhand targets the “mass-affluent” demographic (with investment assets less than $1 million), which he says is being abandoned by advisors and some rivals. Where it differs from its three peers is that Steadyhand chooses outside managers for their asset class skills, meaning clients get both security diversification as well as manager diversification.

Ahmed believes the cost of advice is rising, even as ETFs drive prices on the pure investment portion down. Steadyhand’s fees fall as clients’ portfolios grow and the longer they stay invested. So on $500,000 held in its balanced Founders Fund, the 1.06% fee falls to 0.98% if held more than five years, and to 0.91% after 10 years. Those with at least $1 million invested pay 0.93% from the get-go, falling to 0.87% after five years and to 0.80% after 10 years. The all-in fee structure includes the cost of investment advice.

Steadyhand chief development officer David Toyne says discount brokers still charge trailers on funds bought by DIY investors, but don’t permit DIY investors to buy funds like Steadyhand’s. Even so, 2,800 buy directly from the firm, with $900 million invested in its funds. Consumer advocate Ken Kivenko says were it not for conflicted recommendations from advisors, “Steadyhand would be much larger.”

Norman Rothery of StingyInvestor.com likes both Mawer and Steadyhand. “Mawer is great for people who are happy to put a portfolio of funds together themselves,” he says. “I would point novice investors to Steadyhand, who can give those with more limited means a helping hand with portfolio construction.”

Value shops Chou and ABC

Two other actively managed independents worth considering are Toronto-based Chou Associates, built around Francis Chou; and ABC Funds, built around Irwin Michael. As both have had considerable publicity over the years, these can’t really be described as firms most people have never heard of.

Chou has been around since 1981 and manages $400 million, with five mutual funds available in front-load (Series A) or F-class, with minimum investments of $5,000. Michael founded Toronto-based I.A. Michael Investment Counsel in 1985 and launched his ABC Funds in 1988, each at a minimum $25,000 investment. While famous for his deep-value approach, in recent years Michael has shifted to accommodate the growth trend. Even his flagship Fundamental Value Fund now owns some of the more popular U.S. tech stocks such as Alphabet, Amazon, Apple and Microsoft.

Good value for money?

The question remains whether these lesser-known actively managed fund companies can recoup their fees over the long run, given the usual arguments from die-hard indexers.

“I don’t believe it’s worth paying for security selection,” says Michael Wiener, the blogger behind Michael James on Money. Security selection is picking individual stocks in the hope of generating outsized capital gains above and beyond the broad market. “I’d only consider actively managed funds if they came with advice valuable enough to justify the added costs,” he adds. “Any time I’ve looked into fund outperformance, either the time-frame was short, or the fund had drifted to known factors (such as skewing portfolios to small-cap stocks or out-of-favour “deep value” stocks) that increase risk and return.”

Fee-based advisor John De Goey, of Toronto-based Wellington-Altus Private Wealth Inc., is on the fence. “I acknowledge some people can do well enough to justify it. Price is what you pay; value is what you get,” he says. “Active managers need to add enough value to justify higher cost, but very few can outperform over long time horizons. The handful that do so do not persist and cannot be reliably identified in advance.”

What about firms like Leith Wheeler or Mawer? “In my opinion, they win the reverse beauty contest. They’re the least ugly of the active folks,” De Goey quips. But he adds that factor investing — a way of skewing otherwise passively managed ETFs to screen for certain types of stocks, such as low-volatility stocks or “momentum” stocks that have experienced recent price surges — and passive investment options are likely to perform better over the long run. “Most people who buy active are uninformed,” he says. “To the credit of Mawer and Leith Wheeler unit holders, I acknowledge they are generally better informed than most active investor clients.”

Steadyhand’s Ahmed argues Canadians are still paying too much, whether they go active or passive, and the culprit is the added cost for advice. “Most investors need help with their investment plan and pay 1% or more for that advice,” he says. “That’s on top of product costs, so even passive investors end up paying 1.5% in fees, all-in (including taxes and administrative charges). That’s still expensive.”

Generally, he adds, there are three ways Canadians can invest: with an advisor, through discount brokers, and the direct channel (through the investment firm itself). Investors become attracted to the direct channel once they realize these companies provide professional advice and investment management at a low cost. “Problem is, few Canadians know there’s an alternative to the traditional advisor unless they go purely the DIY route.”

Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]


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