Investors and advisers see the Management Expense Ratio (MER) as a useful means of comparing the cost of investing in one superannuation or investment fund against another. This paper, however, contends that the MER is an unreliable and naive method of fee disclosure that does not allow a uniform comparison between funds. This is because there is no consistency in the definition of management expenses for the purpose of the MER calculation, and due to variations in the methods used to calculate funds under management. In all, five significant issues are identified that reveal the MER is an unreliable tool for investment decision making. Using a hypothetical investment fund, the distortion on MER is illustrated between funds when taking account of differing asset valuation techniques, changes in the periodicity of fee calculation, and the growth in funds under management. This variance is evaluated using the Growth Distortion Model. The paper proposes a new framework for fee disclosure, the Performance Cost Ratio, which overcomes the current deficiencies in Australian investment fund fee disclosure.
Publisher version archived with the permission of the publisher Macquarie Graduate School of Management, Macquarie University, NSW, Australia. This archived copy is available for individual, non-commercial use. Permission to use this version for other uses must be obtained from the publisher.