Andrew Allentuck

Friday, December 29, 2000

The Money Machine: How the Mutual Fund Industry Works - and How to Make It Work for You
By Daniel Stoffman
Macfarlane Walter & Ross, 240 pages

Journalist Daniel Stoffman takes on the Canadian mutual fund industry for the high fees it charges and what he says is the inadequate disclosure it provides. With fine writing and a sense of irony, he makes a case that the Canadian mutual fund industry is run by managers who put distribution - selling funds - ahead of delivering performance to unitholders.

Mr. Stoffman's case is well wrought, but it's not as black and white as he makes out. He calls investing a "black art," which is a canard. Structure a fund with the right degree of diversification, control the volatility, build in some earnings sensitivity and the thing should delivery handsome profits over time, provided, that is, that management fees are not too high.

The Money Machine is on firmer ground in the case it makes against the insidious effects of high fees. As he notes in his concluding chapter, a fund held for 25 years that charges 2 per cent per year for its management fees will deliver 60 per cent less in total returns than one that, like certain funds sold to groups of teachers, charges only 0.15 per cent per year. Mr. Stoffman says fee reform in the form of unbundling of services and competitive reductions from the brute force of competitive American fund operators will drive down management expenses extracted from fund clients. He asserts that price in the form of fee structure is all that distinguishes one fund from another. Wal-Mart gets business by being efficient and selling for low prices. Should funds not be the same?

Mr. Stoffman is right to say investors should keep their fees down. Yet there are more shopping skills required in assembling a strong fund portfolio than just looking at the price tags. Nevertheless, for the less experienced mutual fund investor, The Money Machine can teach the valuable lesson that what heavy management and sales fees pay for is selling which, while good for the sellers, has little to do with performance obtained by investors.