Canada's mutual fund industry intends to issue a belated response to a draft version of a controversial academic study that says Canadian fund fees are higher than 17 other developed nations.

However this supposed "rebuttal" (if that's the relevant word) won't come until the end of this month, according to the Investment Funds Institute of Canada. In the meantime, several documents flying through cyberspace shed more light on the methodology used in the study, "Mutual Fund Fees Around the World."

In response to feedback by Canadian commentators, professors Ajay Khorana, Henri Servaes and Peter Tufano are circulating two pages of explanatory notes on Canadian fund data.

They clarify the study was not of the Canadian fund industry per se "but rather includes Canada in a sample of 18 developed countries. We took as much care as possible to make sure that all of our data was consistent ... the source of our Canadian data is Morningstar Canada."

The notes appear to dash any hopes the industry may harbour that the final version of the report might make Canadian fees look less egregiously high.

Because the actual level of various types of sales charges are not always included in Morningstar data, the report's authors "suspect that our failure to measure Canadian fund sales charges could underestimate fees in Canada."

The profs also quash the argument they might have "double counted" front and rear load sales charges. "We used a similar methodology and a similar holding period across all countries."

They also confirm the report does not include "seg" funds, which are a type of guaranteed mutual fund sold by life insurance firms. Management Expense Ratios (MERs) on Canada's segregated funds tend to be notoriously on the high side. So here, too, the study actually errs on the side of understating Canadian MERs, rather than overstating them as the industry would prefer the public believed.

Next, the profs tackle the objection their calculations include payment for "advice" in Canada. As we noted here in August, a big reason Canadian MERs are so high is that advisors receive annual "trailer" fees of 0.5% to 1% (or even 1.15% at certain bank no-load fund outfits).

The professors say they did factor in trailers but did the same elsewhere. "In the U.S. 12b-1 fees and loads are used to compensate brokers for providing advice. We feel that our comparisons are therefore appropriate from country to country."

The professors note that where consumers pay wrap fees or pay fees directly to financial advisors, "we cannot observe them and therefore they are not included in our analysis."

They then make the comical (to me, at least) suggestion that "if Canadians pay more for advice, one would expect they would experience greater performance or satisfaction, which we do not study in our research."

The profs close with a reference to a section of the report entitled "a tale of two North American neighbors," which relates the difference in MERs between otherwise identical Fidelity Japan Funds sold in Canada and the United States.

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