Advantages… Kind Of
The whole idea behind the creation of these funds (alternatively known as “mutual fund switch corporations”) is for large-scale investors to be able to move in and out of certain mutual funds without triggering investment-related tax burdens. Essentially, certain companies will boast a menu of corporate class mutual funds, and investors can buy and sell these funds within that menu and defer your tax payments until it is most beneficial for you to realize the income (in the form of capital gains). The sales pitch behind this sort of advantage is that you might want different investing exposure throughout your lifetime, or you may want to rebalance your portfolio, and these “families” of mutual funds allow you to do that cheaply and efficiently. Personally, I’m not a huge fan of planning investments around tax liabilities to begin with (see Young’s experience with flow through shares), but there is no doubt that tax effectiveness is a huge part of your overall financial plan; therefore, I can see how a creative salesman could market corporate class funds in a slick manner.
Problems With Corporate Class Funds
Here is the myriad of problems I have with the whole idea of these funds. First and foremost, these investments make absolutely no sense unless you have maxed out all of the room in your registered accounts. These unique funds almost always have a higher MER rate than their regular mutual fund little brother, and consequently you could simply buy the run-of-the-mill mutual fund and put it in your RRSP/RESP/TFSA and get the same benefits for a lower MER percentage. That being said, in defence of corporate class funds they don’t really claim to be for the average investor. Just so we’re clear, they are utterly indefensible in my mind if you still have room in your registered accounts (and hey, if you’re maxing out your RRSP/RESP/TFSA every year, then you’re further ahead in the game than I am to be brutally honest).
The second problem I have in principle is not solely with “mutual fund switch corporations”, but instead with mutual funds in general. I can’t stomach the idea of most mutual funds saying that they will outperform the market because there is simply no academic evidence to balance this out in the vast majority of cases. Most mutual funds don’t beat the market BEFORE fees are calculated in. When you factor in the 2.1% MER fee average in Canada, less than 1% of mutual funds beat the market average over an extended period of time, and corporate class funds usually add another .2%-.4% of fees on top of that! It just doesn’t add up no matter what your advisor tells you.
The final issue I have with the concept of being able to switch mutual funds at will within a certain menu is the idea that you want to switch mutual funds at all. This marketing is aimed specifically at the sort of investor that believes they can outsmart the market by timing certain trends and picking the right stocks/funds. My guess is that these funds are disproportionately owned by males because of that very reason! I can see how it makes a certain degree of sense if you simply want to rebalance your portfolio, or gradually move into a more conservative asset allocation over a decade or something like that, but I would bet that the majority of trading back and forth is part of speculation and not much else.
KISS – Keep It Simple Stupid
No matter what tax advantages corporate class funds can offer me I can’t say I’m very interested due to the fact I have no faith in my ability to pick mutual funds, or mutual fund managers’ ability to choose investments for the long term. Once again, it bears repeating that I would never advise anyone to look at these investment vehicles if they still had any room left in their registered accounts. Obviously I am still partial to ETF/passive investing inside of registered accounts as the first course of investments. After that you are dealing with unregistered investments, and if you truly believe you can avoid enough taxes to offset bad mutual fund managers and MERs that reach into the 3% range, then be my guest. As long as you’re maxing out your registered accounts, you’ll be just fine in the long run anyway. I would argue that even in your unregistered accounts you’d likely be better off just throwing darts at list of TSX and NYSE stocks and investing in them for the long term, or specializing in a Canadian-dividend specific strategy while balancing your international exposure in your registered accounts.