A Management Expense Ratio (MER) is the sum total of the management fee, operating expenses and taxes charged on a particular fund, expressed as a percentage. There’s a few things not included, like the trading costs – which are usually negligible. And some funds charge additional fees, not expressed in the MER.
The Management Expense Ratio is important to know, while a fund that your advisor chooses may perform well, it isn’t until you deduct the management expense ratio that you’ll actually know your net return. For example, if a fund earns a positive return of 10% for a given year, and the MER is 2%, the net return is 8% – or, the growth you actually see.
What is a management fee?
Management fees are charged by the portfolio or fund manager. Each segregated fund (or mutual fund) is actively managed by professional money managers who monitor the funds investments on a daily basis, adjusting holdings to achieve the funds goals, or manage the risk, accordingly.
By actively adjusting the holdings, reflecting current market conditions, the fund manager is essentially trying to ‘beat’ the market – as in, do better than doing nothing. Some argue, investors who work with actively managed funds do better over time – and the longer they are working with an advisor, the better they do. Remember, not working with an advisor or an actively managed fund doesn’t mean the MER’s are gone, they’re just less.
What are operating expenses?
Operating expenses pay for ‘running’ the fund, or its daily activities. Those activities can include administration costs like filing paperwork and paying the people who do it, accounting fees, providing reports for investors, auditing and legal fees, etcetera.
For more concepts and definitions, explore our related posts below.