In the halcyon days of double-digit returns, management fees for mutual funds were easily overlooked. But when markets take a dive, management expense ratios take on a greater significance, according to fund research firm Morningstar.

"When the market was running up fast, it was easy to hide a 2.5% or 3.5% MER. If we only expect single-digit returns going forward, that's going to be a much bigger chunk of your total return and you should be shopping around," said Stephen Burnie, Morningstar's director of research.

"In the late 1990s, when many mutual funds were racking up 20%-plus annual returns and some were even producing triple-digits, a couple of percentage points in management fees didn't seem to matter much," added Morningstar analyst Mark Warywoda. "But in the here-and-now, how much of one's hard-earned cash gets ****ed up by fund company expenses may play a more crucial role in the attainment of one's investment goals."

Morningstar today released its latest monthly survey of mutual fund performance, noting that five-star funds also tend to have the lowest MERs. "We found that there's clearly a cost advantage to five-star funds," said Burnie. "The issue comes up now because we've had a severe market downturn and it's time to start paying attention to cost cutting."

Morningstar assesses each fund's risk-rating relative to its peers in the same category, based on historical performance, and factoring in MERs. Funds with a negative return can still receive a five-star rating simply because they're the best in a particular category. "There's no qualitative aspect to the rating," Burnie notes. "We don't make a judgement about whether the company is good or the fund is a good investment. It's purely based on historical risk-adjusted performance. So if a fund continuously outperforms its peers, it will score very highly." Burnie says MERs for Morningstar's five-star funds range from as low as 27 basis points to as high as 7.2%.

Only funds with at least a three-year track record are rated by Morningstar. A total of 152 funds had five-star ratings as of June 30. CI, with 10, has the most five-star funds, followed by AIM with eight, Mackenzie with seven and AGF with 6. Franklin Templeton and Phillips Hager & North both had five. Twenty-two funds were elevated to five-star status last month, including five from AIM and three from CI.

If you feel you would like to reduce your MER's on your portfolio, you may want to speak with your financial advisor to discuss the appropriate cost saving solution.

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John Klotz is a Certified Financial Planner at LMS Prolink. He can be reached at (416)-595-7484 ext. 305 or email at johnk@lms.ca