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CSA publishes Q&A on Cumming report

By Andrew Rickard | February 11 2016 01:26PM

The Canadian Securities Administrators (CSA) have released a follow-up document to answer questions it has received concerning the Cumming report. It concludes with blistering criticism of the research methods used in another report on fund fees and the value of advice conducted for the Investment Funds Institute of Canada by Investor Economics.

In the fall, the CSA released the report it had commissioned from Douglas Cumming, Sofia Johan and Yelin Zhang on mutual fund fees. On Feb. 9, the regulators published a series of questions and answers on the document.

"In the interest of facilitating an open policy discussion on mutual fund fees in Canada, the Canadian Securities Administrators (CSA) have asked Professor Cumming to publish a list of the questions he has received thus far along with his responses so that all stakeholders may benefit from the information," reads the introductory statement.

One question asked where the data set under the “no load” fund sales came from and how it differed from “front end load” given that the vast majority of front end sales go in with zero commission charged. "My suspicion is the “no load” data set came from the bank branch distribution system and/or the DIY channel but I’d like to clarify," reads the anonymous question.

The authors say that the no load funds in their report are simply the ones that fund managers identified in their data submission as being "no load". "Without acknowledging or confirming who participated in the survey we can state that yes, these purchase options are typically offered by bank owned fund manufacturers but they are also offered by other non-bank fund manufacturers as well," they respond.

The Investor Economics report studies the wrong measure of returns

Another question suggests that, since the Cumming report relied on data received directly from the fund managers, it doesn’t seem to take into account the fees paid by consumers directly to advisors in a fee-based arrangements. If fees are paid directly to the advisor and not deducted "at source", presumably they do not show up in the report's dataset.

"Yes, that is correct. We did not receive this information,” reads the response. “However it is important to note that all risk-adjusted outperformance calculations were done using fund series returns gross of fees. So the analysis focuses on whether investors and their advisers seek out skilled fund managers or not. The evidence suggests that this is much less likely when advisers and their dealers are paid trailing commissions, when advisers work for dealers that are affiliates of the fund manager and it is less likelier still when advisers use the deferred sales charge purchase option".

And does the report account for the value of advice? "It is true that we did not have access to account level data so it may be possible that investors are receiving other benefits from this relationship," say the authors. "In our view however, these ‘other benefits’ would need to be quite substantial (in terms of improving risk adjusted returns) to offset the foregone returns stemming from the use of trailing commissions, deferred sales charge arrangements and dealer affiliation."

In response to a final query which referred to another study commissioned by the Investment Funds Institute of Canada and conducted by Investor Economics on the value of advice in the context of mutual fund fees, flows and performance, Cumming and his colleagues supplied a nine point outline explaining why they believe Investor Economics’ research is flawed.

"In summary, the Investor Economics report studies the wrong measure of returns with insufficiently detailed data, and completely incorrect econometric methods that ignores over half a century of econometrics and statistics, and has qualitative arguments that only serve to highlight the mistakes with the econometric methods used," concludes the response. "Without the necessary econometric underpinnings and data, Investor Economics can say absolutely nothing about the relationship between mutual fund performance and mutual fund flows or about other pertinent factors that may affect those flows."

These are just some samples from the series of questions and answers. The complete document is available on the Ontario Securities Commission web site.

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