Opportunities for Creative Disclosure : Distortions in the Calculation of Mer

This paper examines the important role of the Management Expense Ratio (MER) in fee disclosure, and why it is useful in assisting investors in the selection and retention of investment funds. Reporting on a study of 50 Australian investment funds, this paper identifies 17 different fee types levied by investment funds and concludes that only a small proportion of these expenses are included the MER calculation. The research also identifies variations in the way that MER is calculated between different funds which undermines the usefulness of this measure. This paper identifies the distortion that affects MER disclosure, as a result of growth in Funds Under Management (FUM). The introduction of the Growth Distortion Model provides a tool for investment funds to calculate expense accruals to match a target MER, and a tool for investors to compare actual expense ratios between different funds.Finally, this paper introduces the Performance Cost Ratio as an alternative approach to fee disclosure which is designed to overcome the deficiencies identified in MER calculations in Australia