Do your fund's fees provide good value?

"Active share" measures bang for your buck.

Christopher Davis 8 May, 2017 | 5:00PM

When I'm choosing between brand-name Aspirin and the generic alternative, I almost always opt for the latter. Both share the same major ingredients, but the generic competitor is usually a lot cheaper. I'd pay a small premium if the brand-name product is longer lasting, easier on my stomach, or more effective. A superior alternative without a generic rival may be worth a higher price.

Fund investors face a similar choice between active and passive management. Many active managers fear impatient investors (or employers) will fire them if they underperform by limiting the risks they take versus their benchmarks. As a result, active and passive portfolios are made of similar ingredients. If the portfolios look alike, the cheaper, passive option appears to be the easy choice.

Not every choice is as simple. Nominally active funds could still stand decent odds against their benchmarks if their price tag is low enough. Higher-cost funds may yet outperform if their portfolios are distinctive enough. Fees are the most reliable guide to a fund's prospects, but investors should consider not only what they're paying but what they're getting. As Warren Buffett put it: "Price is what you pay. Value is what you get."

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Absolute Software Corp14.61 CAD3.62
Medicure Inc0.93 CAD-2.11

About Author

Christopher Davis

Christopher Davis  Christopher Davis is Director of Manager Research at Morningstar Canada.

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