Two firms that can help DIY investors

Mawer and Vanguard Canada are investment firms that offer some great mutual funds which can benefit many do-it-yourself investors.

But there is a hitch. Many online discount brokers won’t allow you to purchase these mutual funds on their platforms.

The apparent reason is that Mawer and Vanguard Canada are among the small group of mutual fund providers that refuse to go along with the common mutual fund practice of collecting and then paying behind-the-scenes trailing commissions to discount brokers.

That fee practice has long been controversial. The Canadian Securities Administrators is set to ban it in the discount broker channel, but the effective date is not until June 2022. Presumably then discount broker exclusions of these funds become pointless and will be lifted.

But for now, do-it-yourselfers will often find it difficult to buy these funds, which is a shame.

Vanguard Investments Canada Inc. is the Canadian arm of a global investment firm best known in Canada for its index ETFs. But in Canada, it also offers four well-regarded active mutual funds that cannot be purchased at the six major bank-owned discount brokers, a Vanguard spokesperson confirmed. Instead, you’ll need to go to a non-bank discount broker like Questrade or Qtrade Direct Investing to get them.

Mutual funds from Mawer Investment Management Ltd., a respected mid-sized independent Canadian investment firm, enjoy somewhat wider availability at discount brokers. Still, you cannot purchase their mutual funds at RBC Direct Investing, while TD Direct Investing allows purchase of “select” Mawer funds, indicate industry sources.

With thousands of mutual funds out there, you might think you’re not missing much by being shut out from a few fund providers. But the mutual fund industry is crowded with mediocre funds burdened by high fees, while Mawer and Vanguard Canada offer some exceptional funds with reasonable fees.

In addition, Mawer and Vanguard Canada mutual funds are strong in equity investing outside Canada. Many do-it-yourself investors are heavily exposed to Canadian stocks and can benefit from diversifying more with foreign equity.

Also taking a stand against trailing commissions paid to discount brokers are two other respected mutual fund providers, Steadyhand and Leith Wheeler. They, too, are shut out of some discount broker platforms. But you can also purchase Steadyhand and

Leith Wheeler mutual funds directly from the firms themselves and get quality investment advice in the process. So getting the cold shoulder from some discount brokers doesn’t create as big a barrier for buying those particular funds.

Easy to overlook

Trailing commissions are easy to overlook because you don’t pay them directly. Instead, the mutual fund provider collects them as part of a bundle of fees taken from fund assets. Then the mutual fund provider pays the trailing commission behind-the-scenes to the distributor, in this case the discount broker.

Many of the mutual funds held at discount brokers are A-series mutual funds, which typically pay trailing commissions of one per cent per year for equity funds and 0.5 per cent per year for bond funds. That’s objectionable in the discount broker channel because those sizable trailing commissions pay for advice discount brokers don’t provide.

There’s a relatively recent trend toward switching into D-series mutual funds with reduced trailing commissions designed for the discount broker channel.

The D-series trailing commissions are intended to pay for service but not advice, and are typically 0.25 per cent per year for an equity fund and 0.15 per cent per year for a bond fund.

But that still can add up to a lot of money over time.

Neither Vanguard nor Mawer feel that collecting and then paying any trailing commission to discount brokers is in the best interests of investors.

“We don’t pay commissions for distribution of our mutual funds anywhere in the world,” says Kathleen Bock, head of Vanguard’s non-U.S. Americas business. “Not only does that avoid a conflict of interest, but it keeps the cost low. That really matters over time to investors.”

Mawer takes a similar view. Even for D-series funds with reduced trailing commissions “there is still an inherent conflict because the client doesn’t know what they’re paying for and whether they are receiving ongoing services for paying an ongoing fee,” says Craig Senyk, Mawer president.

Senyk notes that mutual funds increasingly compete with ETFs, which do-it-yourself investors can buy at a discount broker for a small one-time trading fee with no ongoing trailing commission. That contributes to making ETF fees much cheaper than D-series mutual fund fees. “D-series is a lot better than the A-series (but) it doesn’t make sense in the context of the larger market,” Senyk says.

Mawer

Mawer is a medium-sized independent Canadian investment firm, owned by current and retired employees, which offers 13 mutual funds. (Confusingly, Mawer mutual funds are technically listed as A-series funds, despite being a rare exception with no trailing commission and much lower fees overall.)

With its equity funds, Mawer invests in strong wealth-creating companies, with excellent management teams, which can be purchased at a discount to intrinsic value.

Its funds tend to hold a relatively high proportion of growth stocks, although Mawer invests in diverse types of companies wherever it sees the right combination of attributes.

Mawer also provides investment counselling for large-balance personal investors, serves institutional clients like pension funds, and manages funds sold through advisers via Manulife. (These Manulife funds include conventional A-series mutual funds with full trailing commissions and thus higher total fees, which may be justified when the investor requires and receives good financial advice.)

Mawer has closed its wellknown international fund to new institutional clients to avoid getting too large, so its success allows it to pick and choose the business it takes on.

“We don’t need to be in the do-it-yourself market because we’re seeing more than enough growth in the other segments,” says Senyk.

But he says offering good mutual funds at reasonable fees accessible to small do-ityourself investors “feels like the right thing to do.”

Mawer has achieved good investment results throughout its lineup of equity and balanced funds, but it is best known for international and global investing. (In the fund world, “international” refers to investments outside North America.)

Here are three good Mawer equity fund options, which all have strong current Morningstar Canada star-based performance ratings and reasonable management expense ratios (MERs): Mawer International Equity Fund (4-stars, 1.40% MER); Mawer Global Equity Fund (5-stars, 1.31% MER); and Mawer Global Small Cap Fund (5-stars, 1.76% MER). A good balanced fund option is the Mawer Balanced Fund (5-stars, 0.92% MER). A Morningstar rating of four or five stars indicates better historical performance compared to most mutual funds in a similar category.

Vanguard Canada

Vanguard is well-known in Canada for its index ETFs. But what most Canadian investors don’t realize is that Vanguard is also one of the largest and most respected active fund managers in the world.

Earlier this year, Barron’s Magazine ranked Vanguard as first in the U.S. for active fund families for both 10-year performance and 5-year performance, and third for 2020 performance. The ranking covered active mutual funds and active ETFs.

Vanguard Canada offers four active mutual funds in Canada, introduced about three years ago.

While their track record in Canada is short, each of those funds is modelled on a wellestablished U.S. or U.K. mutual fund that has achieved credible long-term results.

Vanguard also charges remarkably low fees as shown in its management expense ratio (MER).

Vanguard is owned by its mutual fund investors in the U.S. and relies heavily on outside investment managers. Interestingly, it has achieved strong results in both growth and value funds, despite the vast differences in approach.

Here are the four Vanguard Canada mutual funds, with current MERs and Morningstar star-ratings of the related fund version in the U.S. or U.K: Vanguard Global Balanced Fund (with equity component oriented to value investing, MER 0.57%, 5-stars in U.S.); Vanguard Windsor U.S. Value Fund (MER 0.51%, 4-stars in U.S); Vanguard International Growth Fund (MER 0.58%, 5-stars in U.S.); Vanguard Global Dividend Fund (a reasonable way to add global diversification for dividend investors, MER 0.50%, 3-stars in U.K. according to Vanguard).

A star-rating for the Canadian fund versions requires a minimum three-year track record and should be available soon. David Aston, a freelance contributing columnist for the Star, is a personal finance and investment journalist. He

You might think you’re not missing much by being shut out from a few providers. But the industry is crowded with mediocre funds