Tom Bradley of SteadyhandLaura Leyshon/The Globe and Mail
You've read it in the newspaper and heard it on TV: To boost investment returns, buy low-cost mutual funds and exchange-traded funds (ETFs).
But what are the low-fee fund families, how have their funds performed and when does it make sense to buy them?
"The starting point is what kind of exposure you're looking for," says Dan Hallett, vice-president of HighView Financial Group in Oakville, Ont. If you want to invest in global small-cap companies, for example, "there are not many Canadian ETFs that offer that."
Low-cost fund companies have some real winners.
The no-load Mawer Global Small Cap Class A had an average annual return over the five years ended Dec. 31 of 25.41 per cent, compared with 13.38 per cent for its benchmark. The fund's management expense ratio (MER) is 1.78 per cent.
The Steadyhand Small Cap fund had an average annual return of 18.16 per cent over five years, compared with 15.82 per cent for the benchmark. MER: 1.70 per cent. ETFs, in contrast, tend to track the benchmarks pretty closely.
Mawer Investment Management Ltd. of Calgary offers a combination of low fees and high performance. Mawer's 10 top-performing mutual funds are an offshoot of its institutional money management business. Minimum purchases are $5,000 through an online broker or $50,000 directly from the firm.
Performance isn't the only reason to buy low-fee funds. While ETFs can be attractive to cost-sensitive, do-it-yourself investors, low-fee fund families can be ideal for people who are "a bit intimidated" by the thought of opening an online brokerage account, and unsure of the mechanics of online trading, Mr. Hallett says.
At Steadyhand, investors can choose from six funds, with the balanced Founders Fund being a good place to start. Investors buy directly from Steadyhand with a minimum investment of $10,000 a fund.
What sets the firm apart is the clarity, frequency and simplicity of its communication, much of it through blogs and other information posted on its website – and it gives advice to clients by phone.
"Most people need a little help with their asset mix," says Tom Bradley, who co-founded Steadyhand Investment Funds of Vancouver in 2007 with Neil Jensen, chief operating officer. Mr. Bradley was a former chief executive officer of Phillips, Hager & North.
"You could drive a truck through the opportunity to lower fees, help people build portfolios, communicate more simply with less jargon," Mr. Bradley says. "Mostly, we keep people on track, which is where the name comes from."
The investors who stand to benefit most from Steadyhand's service are those with $250,000 to $1-million to invest – a group that may not be well served by the big investment dealers, Mr. Bradley says.
The Steadyhand Founders Fund, which holds a mix of global stocks and bonds through other Steadyhand funds, was up 15.7 per cent last year, not bad for a balanced fund. The fund was created in 2012. It charges a single, all-inclusive fee starting at 1.34 per cent for small portfolios and falling as the portfolio size increases.
Other balanced funds have done even better. The Mawer Balanced Class A fund, for example, rose more than 20 per cent last year and has a MER of 0.96 per cent.
"I'm a proponent of cheap, balanced funds, especially for people who want simple solutions," Mr. Hallett says. "For people with even well north of $100,000 to invest, a good, cheap, balanced fund is a great investment." Because investors tend to hold balanced funds longer, they enjoy better performance, he adds.
For more conservative investors, the Steadyhand Income Fund, which holds mostly bonds, had an average annual return of 10.83 per cent for the five years ended Dec. 31. The benchmark returned just 5.82 per cent. The fund's MER is 1.04 per cent.
A bond fund with a longer track record is Beutel Goodman Income-D, which returned an average of 5.90 per cent over the 20 years ended Dec. 31, compared with 5.02 per cent for its benchmark. The MER is 0.77 per cent.
Steadyhand is the only one that does not sell through brokers. Mawer, Phillips, Hager & North (part of RBC Wealth Management PH&N Investment Counsel) and pension fund manager Leith Wheeler Investment Counsel Ltd. of Vancouver give investors in most provinces the choice of buying directly or through an online broker. The minimum investment is lower when funds are bought through an online brokerage.
Beutel, Goodman & Co. Ltd. of Toronto, another big money manager and the only load fund in the group, sells only through brokers.
In the end, it's not a case of funds versus ETFs, industry analysts say. Most investors will have both.
"I see room for both passive and active management," says Rudy Luukko, investment and personal finance editor at Morningstar Canada. "Active management really pays off for areas like small-cap investing, where there are very few index choices," he adds.
Still, cheap mutual funds that perform well relative to their peers and index funds such as ETFs – regardless of the category – may prove an alluring choice.