Sales Charges Vary Widely Among Funds, but Performance Counts Most
What does it cost?
That’s a pretty easy question for most products, but not mutual funds.
Funds can carry any of several types of sales fees or none at all. When a charge applies, it cuts into your investment, either in one big bite or gradually over the course of a year.
When it comes to mutual funds, few topics seem to fan as many strong feelings. “People get rabidly stirred up about fees,” says Nannette Macbeth, a vice president at Merrill Lynch’s Fullerton office.
In part, the controversy reflects the dramatic variations in sales charges from one portfolio to the next. Also, some are more obvious--or, in the view of critics, misleading--than others. Here’s a rundown on the most common fees and the debate that each sparks:
Front-End Loads
These are deducted from your initial investment and any additional purchases. Loads range as high as 8.5%--or 9.3% of the amount actually invested. Many funds will cut the fee on large purchases--typically in the six- or seven-figure range.
In most cases, the money generated by a load goes to the broker, financial planner or other middleman who sold the fund. However, you might also face a front-end sales charge when investing directly with certain fund companies.
Boston-based Fidelity Investments, for example, imposes so-called low loads, in the 2% to 3% range, on many of its portfolios. Fidelity, not a middleman, pockets the money.
That’s a relatively new twist. For decades, mutual funds, especially stock funds, featured “full loads” of 8.5% or thereabouts. Then in the 1960s, criticism of such hefty charges led to a proliferation of “no-load” funds, which put all of your money to work right away.
But many no-loads, unable to attract significant investor dollars without the help of brokers, found it necessary to add fees. “In recent years, there’s been a movement toward the middle,” says Reg Green, editor of the Mutual Fund News Service, a trade newsletter based in Bodega Bay, Calif.
Load companies and the brokers who market them offer several arguments in defense of sales charges. In particular, brokers can recommend a specific portfolio and offer other advice that investors can’t get from fund companies.
“This is a complicated business, and most people don’t have the time or expertise to follow their investments by themselves,” Macbeth says.
Also, brokers can handle all the paper work relating to a fund purchase. With no-loads, it’s up to the individual to request a prospectus and application, fill out the forms, mail them in and monitor the account.
Do load funds justify their added cost by delivering superior investment results? That point hasn’t been proved.
“Some load people have implied over the years that the sales charge enhances performance but it has nothing to do with performance,” contends Irving Straus, president of the 100% No-Load Mutual Fund Council, a New York group whose members include 31 management companies.
Yet load portfolios continue to attract substantial sums of money, indicating that a large proportion of the population is willing to pay for financial advice and assistance. “Most people have to be sold on investments and the sales charge reflects that,” Green says.
Redemption Fees
You pay these charges when you sell or redeem shares. In some cases, the intent is to discourage people from opening an account and closing it shortly thereafter. For example, the Acorn Fund in Chicago imposes a 2% redemption fee--but only for investors who sell shares in the first 60 days.
Another type of redemption fee--a more common, complicated and controversial one--is the “contingent deferred sales charge,” or back-end load. This charge, also designed to discourage investors from cashing in shares, typically starts out at high levels and is phased out over several years.
Prudential-Bache Utility, a top-performing utility fund, features a contingent deferred sales charge that begins at 5% and declines by 1 percentage point each year until it vanishes after five years. People who sell within 12 months of investing face the full levy. They pay 2% if they redeem during the fourth year.
Several national brokerages make wide use of contingent deferred sales charges. Usually the funds carry either an up-front or a back-end load, not both. Funds that use the latter may be referred to as no-loads, which confuses some people, Straus says.
12b-1 Fees
At first glance, people who intend to invest for the long haul might not object to a contingent deferred sales charge because it phases out over time. There’s just one problem: Fund companies that impose back-end loads typically also charge 12b-1 fees, which are named after a Securities and Exchange Commission rule.
These annual fees are designed to pay for marketing and distribution expenses, including advertising. Some fund companies also use 12b-1 proceeds to compensate brokers. Also, some firms without a back-end load charge a 12b-1 fee.
There’s no limit to what a fund can impose in annual 12b-1 fees, although it’s rare to find levies higher than 1.25% a year. Many companies charge considerably less, frequently 0.5% or under. At such measly levels, it would seem that this fee wouldn’t make much of a difference. But it can.
Keep in mind that an investment company can impose the charge year after year. If the portfolio appreciates substantially over time, the company can skim that modest fee from a larger account balance. Eventually, a 12b-1 can cost more than a front-end load. Yet funds that impose the fee are also allowed to call themselves no-loads.
Critics routinely denounce the 12b-1 fee as one more expense that investors might not be aware of, and they rail against the perpetual nature of the expense.
Yet it’s also true that a fund’s all-important total-return numbers already reflect this levy. “If a portfolio manager can charge a 12b-1 fee and still perform well, more power to him,” says Walter Frank, chief economist at Donoghue Organization Inc., a Holliston, Mass., company that tracks mutual funds.
In fact, Donoghue’s Moneyletter, an advisory publication, sometimes recommends funds that carry 12b-1 fees or loads of up to 4%--if they meet other investment criteria, Frank says.
Should you steadfastly avoid funds that tack on front-end loads, 12b-1s or redemption fees? Not necessarily.
Investment returns remain the ultimate test, and many top funds carry a sales charge.
Just keep in mind that each expense represents an additional hurdle that the portfolio manager must try to overcome.
SPOTTING MUTUAL FUND FEES There’s a quick way to find out if a fund carries a sales charge. Simply look it up in a newspaper. Daily mutual fund tables list several key notations that can alert you to the presence of a front-end or back-end load, any other redemption charge, a 12b-1 fee or a combination of these. However, the symbols won’t always tell everything about a sales charge. For details, you should consult the fund’s prospectus, available for free upon request. One more note: Some of these notations don’t appear in newspaper tables that present a weekly roundup of fund prices, including this newspaper edition of The Times. The examples below are from daily roundup.
1. Offer NAV. Funds NAV Price Chg. Gold 11.62 12.70 + .09 Hi Yld 13.58 14.56 - .02 NYTxp 11.65 12.23 + .03 90-10 12.53 13.58 + .10 Oppen 6.83 9.65 + .04 Prem 19.48 21.29 + .16 Rgcy 13.05 14.26 + .09 Specl 19.27 21.06 + .15 Slrlnc 4.90 5.14 + .02
Funds that carry a front-end load are relatively easy to spot. When the ‘NAV’, or net asset value, differs from the ‘Offer Price’, a load applies. To find the size, divide the difference between the two by the offer price. The Oppenheimer 90-10 Fund, for example, carries a front-end charge of 7.73%.
2. Offer NAV. Funds NAV Price Chg. SunAmerica Fds: AgGth p 17.52 17.34 + .03 CapApl 12.23 12.23 + .04 CySec p 9.36 9.83 + .01 Grwth p 15.98 16.78 + .10 HiYld p 8.29 8.70 ... Homel 9.83 9.83 .03 IncPll 6.63 6.63 - .01 Stripe p 12.20 12.81 ...
Just keep in mind that a fund might also levy a redemption fee of some sort, represented by an ‘r’ after the name, a ‘p’ if it features a 12b-1 plan or a ‘t’ if it has both.
3.
Offer NAV. Funds NAV Price Chg. SoGen 17.76 18.45 + .10 SoundSh 13.30 NL + .08 SAM SC 11.96 11.96 + .02 SAM Val 11.76 11.76 + .03 SthestGl 14.14 14.14 + .11 Sover ln 12.41 13.06 + .06 SpPlStk 24.75 24.75 + .25 State Bond Grp: Com Sl 7.91 8.30 + .06
You may find it a bit trickier to analyze funds without front-end loads. When the NAV and offer-price columns list the same numbers, the fund has a contingent deferred sales charge. 4. Offer NAV. Funds NAVPrice Chg. Utd Services: GBT 16.20NL - .04 GNMA 9.14NL - .01 GlbRs r .63NL + .01 GldShr 4.31NL + .10 Grwth 7.08NL + .06 Inco 11.93NL + .07 LoCap r 6.05NL ... N Pro r 1.14NL + .02
A fund that carries the designation NL is a no-load. But if it also has an ‘r’, ‘p’ or ‘t’ after the name, one of these additional charges might apply. Only when a portfolio features an NL without these notations can you assume it doesn’t carry any sales fees.
HOW MUTUAL FUNDS PERFORMED Average total return, including dividends, in percent for periods ended Thursday, May 10 TOP 10
Fund Type Notes 12 mos. Yr.-to-date Week Strategic Investments AU L 12.62% -28.90% 13.55% Strategic Silver S L 29.95 8.48 7.76 International Investors AU L 24.20 -15.15 7.63 Benham Equity: Gold Eq. Index AU NL 20.21 -10.76 7.62 U.S. Gold Shares AU NL 25.88 -16.95 7.56 Fidelity Select Amer. Gold AU LL,R 15.94 -6.06 6.96 Oppenh Gold & Spec. Minerals AU L 7.24 -11.63 6.77 Rushmore: Prec. Metal Index AU NL * -12.41 6.63 Strategic Gold/Minerals AU L 5.75 16.76 6.55 Financial Portfolio: Gold AU NL 16.19 -10.05 6.13
BOTTOM 10
Fund Type Notes 12 mos. Yr.-to-date Week Sherman, Dean Fund CA NL -1.72% -17.49% -1.60% National Real Estate: Stock RE NL -7.04 -5.66 -1.35 Pacific Horizon: High Yield FI LL -14.61 -9.77 -1.28 Equitec Siebel: High Yield FI NL,R -0.89 -2.99 -1.16 Dreyfus Strat. Wld. Rev. WI LL -5.42 -7.01 -1.04 SECURAL: Stock Fund GI LL 16.90 0.81 -1.03 Schield: Value Portfolio G LL -6.16 -5.84 -1.02 Dreyfus Capital Value CA LL 15.87 -5.30 -0.87 Princor High Yield Fund FI L -5.57 -2.35 -0.84 Rochester Convertible Funds CV LL 0.73 -3.83 -0.69
TYPE: AU=gold, B=balanced, CA=capital appreciation, CV=convertible securities, EI=equity income, EU=European regional, FI=fixed income, FS=financial securities, FX=flexible portfolio, G=growth, GI=growth and income, GL=global-international and U.S. stocks, GX=global flexible portfolio, H=health/biotechnology, I=income, IF=international, MI=mixed income, NR=natural resources, OI=option income, PC=Pacific regional, RE=real estate, S=specialty/misc., SG=small company, TK=science and technology, UT=utility, WI=world income.
NOTES: NL means no sales charge, LL means sales charge of 4 1/2% or less; L means sales charge of greater than 4 1/2%; R means redemption fee may apply.
* Fund not in existence for period covered
Source: Lipper Analytical Services
