Are MER comparisons meaningless?

Nick Barisheff laments the media-fuelled misinformation around fee structure and explains why his bullion funds have higher MERs than ETFs

Are MER comparisons meaningless?

Nick Barisheff has lamented the media-fuelled misinformation around fee structure and explained the higher Management Expense Ratios (MER) of his company’s bullion funds.

The founder, president and CEO of Bullion Management Group Inc. (BMG), said that when comparing an equity or balanced fund to a physical bullion fund, MER comparisons are meaningless because precious metal will have storage and insurance costs that don’t occur in paper-based funds.

Why is this important? Some precious metals funds may have lower MERs because they eliminate storage and insurance costs by buying precious metals proxies like bank certificates, unallocated accounts and futures contracts. Barisheff believes, therefore, that investors may be lured by lower MERs when in fact they don’t own any bullion.

He said: “Precious metals ETFs appear attractive to some investors because they typically have lower MERs than precious metals mutual funds and mislead investors into thinking they actually own bullion. These ETFs are simply vehicles that track prices. However, when you carefully read the Prospectus and the Authorized Participant Agreement, it becomes clear that the Authorized Participants lease the bullion that they contribute to the ETF. As a result, legal title to the bullion remains with the Lessor.

“In addition, precious metals ETFs typically do not insure their bullion, and the company has no right to inspect the bullion stored with sub custodians.”

BMG Funds, he explained, have a higher MER because they hold physical bullion on an allocated and insured basis. In addition, BMG Funds buy bullion at wholesale prices without any commission, and they do not have a TER because they don’t trade or rebalance the bullion holdings. It also has an exemption from requiring a portfolio manager – and associated costs - because of its fixed investment policy of investing 95% in physical bullion. BMG does not use any derivatives or hedges and does not lease the bullion.

Barisheff said: “While this may not be appreciated in today’s environment, in the future, when physical bullion is in short supply, it will become critically important to own fully insured and allocated physical bullion.”

In his impassioned defence, Barisheff also delved into a broader issue – that of fee confusion and how many articles conflate MER, the broader cost of the fund to the investor, with the management fee.

While the latter is often used as the key determinant when making an investment decision, MER represents the combined cost of both the administration of the fund, including the total of operating expenses, taxes and management fees, and the distribution costs paid to dealers divided by the fund’s average net assets for that year.

Crucially, this ratio is magnified if the fund has declining assets under management (AUM) growth, resulting in higher MERs, than one that has positive AUM growth. Barisheff argued that using MER to select mutual funds is misleading advice that will not yield the best results for investors.

He said: “Since all performance is measured net of MER, it is best to simply choose funds that have the best performance regardless of the MER. Using MER as an indicator for choosing mutual funds can be misleading because a fund with a lower MER, as a result of high AUM, could underperform a fund with higher MER because the AUM is lower. Since performance must be measured net of MER, a more accurate analysis would be to select funds based on performance and not MER.