Cheap funds ain’t cheap.

Nope, turning pockets inside out is a painstakingly expensive business.

How do we know this?

The mutual fund companies have been proving it for years and a recent study by Morningstar Canada has succinctly driven the point home.

In the oxymoron that is the mutual fund industry, you pay for what you don’t get. If it doesn’t make sense, it makes sense in the hard-ball mutual fund game.

The Morningstar survey reveals that mutual fund managers who lose money for their clients generally charge higher management expense ratios (MERs) than those who make money for people.

The research by Mark Warywoda, Morningstar’s director of analysis, also shows that MERs have gone through the roof in Canada in recent years, but the investors who really got fleeced were usually those paying the most exorbitant MERs.

The MER is expressed as a percentage of a fund’s assets and, although few investors seem to have a clue as to what it is, MERs are posted as part of the data on the funds at various sites, such as www.morningstar.ca or www.globefund.com.

According to Morningstar Canada, the estimated average MER as of April 30 was 2.62% compared to 2.05% in 1995. In 2002, Canadians paid more than $10 billion in MERs for the honour of having their dough flushed down the toilet by portfolio managers, many of whom were loading up on bloated stocks such as Nortel (NT-TSX) before those shares imploded.

In 1995, Canadians paid $2.8 billion in MERs. Our search of a couple of mutual funds with contrasting results bears out the Morningstar research.

One of Canada’s hottest funds during the bear market has been the Mawer New Canada Fund, but it also boasts an MER that is well below the par of 2.62% at 1.59%.

This small-cap fund managed by Martin Ferguson of Calgary-based Mawer Investment Management boasts a compound annual three-year return of 19.2 per cent.

In contrast, one of Canada’s worst-performing funds is the Mavrix Growth Fund, which charges an MER of 3.28%.

So, if you opted to invest in the Mavrix fund thinking that fund manager Mal Spooner must work harder than Ferguson since he charges an MER of 3.28%, you learned that logic doesn’t always cut in when it comes to mutual funds. The Mavrix Growth Fund boasts a compound annual three-year return of -54.3%!

So how will the mutual fund industry respond to this latest survey that has exposed their game?

Don’t expect any dramatic changes.

As long as knucklehead investors continue to play into the hands of these companies without paying attention to MER rates, many will no doubt continue to charge outlandish fees for pathetic results.

* EDGE DIRTY DOZEN UPDATE: Four months ago, we created the Business Edge Dirty Dozen Penny Stock Index (0.0% MER) as a tribute to the much-maligned penny stock.

We’re quite pleased with the early returns. Over a four-month span, the Dirty Dozen has smoked the TSX Composite Index, returning 16% while the TSX returned 6.5% over the same period.

The penny from heaven has been Moveitonline, which surged 152% ($0.40 to $1). In that time, the company changed its name to Producers Oilfield Services (POS-TSX).

Lorus Therapeutics (LOR-TSX) also broke the $1 barrier, racing to $1.32 (+64.3%). Aventura Energy (AVR-TSX) took itself out of the penny game with a 10-to-1 share consolidation but, even at $4.05, the shares are down 3.8%.

Those stocks over $1 are getting the boot and being replaced by Thistle Mining (THT-TSX) at $0.60, X-Cal Resources at $0.33 and Versatile Mobile Systems (VMS-TSXV) at $0.09.

Other Dirty Dozen stocks are Viceroy (VOY-TSX), +37.5%; DataWave (DTV-TSXV), +16.7%; Maxim Power (MXG-TSXV), +8.7%; International Utility (IUS-TSX), +2.2%; Bioscrypt (BYT-TSX), -27.7%; Twin Mining (TWG-TSX), -18.2%; Mainframe Entertainment (MFE-TSX), -14.3%; Rubicon Minerals (RMX-TSXV), -13.7%; and Imaging Dynamics (IDL-TSXV), -6.2%.

* THIS IS YOUR CAPTAIN SPEAKING! For several weeks, almost anyone who knows anything about Air Canada’s financial crisis has been calling the stock worthless. Yet, somebody has been buying the stock as it has traded at astonishingly high levels.

Now, Air Canada, late as usual, is admitting the same, that once the company’s massive debts are settled, shareholders will likely be left with nothing. But people still don’t get it.

Last seen, the shares were still at 89 cents.



HOT ALBERTA STOCK: BIOMIRA INC.
BRA-TSX $5.85
Up $2.75 (+88.7%) on 7,063,500 shares (for week ending June 13).
Remember the buy-on-rumour mantra that was all the rage until three years ago? It’s back. Big time. Look no further than the biotechs. Edmonton’s Biomira almost doubled in a week on no news as investors bet on favourable results from soon-to-be-released results of Phase III cancer treatment trials. Biomira’s spike stole the show from another surging Edmonton biotech, Isotechnika (ISA-TSX).



COLD ALBERTA STOCK: INTERMAP TECHNOLOGIES.
IMP.A-TSXV $3.00
Down 40 cents (-11.8%) on 11,700 shares (for week ending June 13).
Intermap, which had almost doubled from its 52-week low, finally dipped on some profit taking resulting from a strong rally, but may still have legs. Calgary analyst Brian Purdy of Acumen Capital Finance Partners has had a $4.60 target and speculative buy recommendation on the Calgary company that produces digital elevation maps.