Choosing Among Array of Shareholder Services
The mutual fund business in recent years has borrowed an act from the auto industry. As competition has become more intense and buyers more discriminating, fund companies have unveiled additional features--some of which have nothing to do with financial performance.
Many of these innovations fall within the realm of shareholder services. They range from automatic purchase plans to the ability to place open orders when buying or selling funds. No longer can you be content merely with selecting the type of investment vehicle you want, or the one with the most powerful engine. You also need to pick and chose among the various add-ons. Here are some of the more common shareholder services:
* Automatic-purchase plans. You can choose to buy a mutual fund either in one lump sum or in increments. With an automatic-purchase or share accumulation plan, you authorize the fund company to take out a set amount on a fixed schedule, such as $100 a month, from your checking account. You purchase shares in small amounts and at various prices, so you don’t have to worry about buying in at a market top.
An automatic-purchase plan can be a handy means for novices to start investing. “It’s a forced savings plan and for most people a relatively painless way to go,” says Mark C. Winmill, senior vice president at the Bull & Bear Group, a New York-based fund company that’s adopting such a program.
Conversely, you can also select to withdraw money from a fund automatically and at regular intervals. This makes sense if, for example, you’re retired and want to live off of the dividend income that a bond fund generates.
* Dividend-reinvestment plans. But there’s a good reason not to tap your dividends and capital gains distributions. If left alone, this money can be used to buy additional shares, and that can substantially boost the value of your account. In fact, over many years, it’s likely that reinvested dividends and capital gains distributions will come to represent a large proportion of your total profit, bigger even than the nominal appreciation of the stocks or bonds held by the fund.
* Telephone switching. On the other hand, a lot of people find it too difficult, emotionally, to remain invested for the long term, and that’s where telephone switching comes in. This option allows you to move from one fund to another, or back again, with a simple phone call. You may also make exchanges in writing.
Market timers love the telephone service since it allows them to switch quickly from a stock or bond fund to a money market portfolio. “I have some real problems with a buy-and-hold strategy, because it forces you to hang on through crashes and bear markets,” says Charlie Hooper, publisher of the Mutual Fund Strategist newsletter in Burlington, Vt.
While nearly all fund groups now offer at least one money market portfolio, not all allow telephone switching. Even so, the service is becoming increasingly common, especially among no-load and low-load families.
Some firms allow switching, but with restrictions. For example, Twentieth Century Investors of Kansas City, Mo., requires a 30-day wait between movements, while several companies limit the number of switches to four round trips (four buys and four sells) a year. Still other firms impose modest fees of $5 or so per switch.
But that’s not as bad as it might seem. Having investors entering and exiting too frequently can make it hard for a portfolio manager to run a fund effectively, to the detriment of other shareholders. Besides, if you switch too often, you will likely find yourself getting whipsawed. On average, Hooper flashes about 2.3 round-trip switch signals a year. “If you go beyond four, you will have problems,” he says.
* Wide investment selection. Some people might not classify this as a shareholder service, but it’s something you need to consider if you want to do all of your investing under one roof. Most medium and large fund families offer a diverse mix of stock and bond funds that vary greatly in their potential for risk and returns.
In addition, most fund groups will accept your investment dollars in the form of a retirement account--IRAs for individuals, 401(k) plans for companies and Keoghs for the self-employed. Dozens of funds that normally require relatively large investments of $3,000 to $10,000 or more will lower their minimums for people wanting to put money into an IRA.
* Simplified record keeping. Fund companies will periodically mail you statements that show how many shares you own, what they’re worth and when you made purchases and redemptions. The statements list any dividends earned and your share of the fund’s capital gains or losses--a handy feature when it comes time to fill out your tax return.
* Telephone representatives. Fund companies aren’t allowed to offer advice on which portfolios you should buy or sell. It’s up to you, your broker or other financial adviser to make these and related decisions. However, most fund companies have telephone representatives available to field questions and to mail out prospectuses and other fund literature. Most companies now offer toll-free numbers for this purpose.
* Swaps for fund shares. A few groups will allow you to buy shares in their funds, using stock you own as payment. If you have accumulated stock you don’t really want--from an inheritance, for example--this is a way to swap it for a stake in a mutual fund without having to pay a broker commission.
Bull & Bear offers this program, and Winmill admits there’s some case-by-case subjectivity as to which stocks will be accepted. “The securities have to be like those in the fund you want, although they don’t have to be current holdings,” he explains.
For example, if you own 500 shares of IBM, Bull & Bear will let you apply the value of the stock to the purchase of its equity funds. “We wouldn’t want some illiquid, pink-sheet company,” Winmill says, referring to thinly traded over-the-counter stocks. He adds that Bull & Bear prefers to accept round lots of stock (100-share increments) rather than odd lots. Likewise, Bull & Bear will accept certain bonds as payment for shares in its fixed-income funds.
The SFT Group of King of Prussia, Pa., will accept odd lots of stock for an equal value of shares in its Odd-Lots Fund.
* Buying on margin. This involves borrowing money from a brokerage to purchase additional fund shares, just as you can leverage your stock holdings. With margin, you have greater profit potential, along with increased chance of loss. You also must pay an interest charge on the amount borrowed.
To make use of margin with mutual funds, you have to go through a brokerage; the fund companies themselves don’t provide this service. And brokerages vary as to the number of funds they will let you margin. Charles Schwab & Co., the San Francisco-based discounter, has one of the most expansive programs, allowing investors to buy, sell or take margined positions in about 450 no-load, low-load and full-load funds.
As with cars, expect mutual funds to come out with even more and fancier options in the future. Just last month, for example, Benham Capital Management of Mountain View, Calif., unveiled an open-order system that lets you decide in advance the prices at which you wish to buy or sell the company’s funds.
Just call the company, specify your price and wait. When the fund hits that price, Benham executes your order. Unfilled orders expire after 90 days, but you can renew or change them at any time. Stock investors for years have had the ability to place open orders, but Benham’s system appears to be a first for the mutual fund business.
Chairman James Benham expects to see more such innovations down the road. He predicts that fund companies will increasingly try to deliver superior services as a way to differentiate themselves from the competition. With about 3,000 stock, bond and money-market portfolios around and new ones coming out each week, that need is greater than ever.
TIMING YOUR TRADES One key difference between stocks and mutual funds centers on intraday pricing. With a stock, you might get any of several prices, depending on the time of day you buy or sell. Not so with mutual funds. Nearly all funds calculate their net asset values just once daily, at the close of trading at 1 p.m. Pacific time. Thus, you can get only one of two prices on any day the market’s open. Here’s how it works:
If the fund company receives You get the price as of: your mail or phone order: After 1 p.m. Friday, before Monday’s close 1 p.m. Monday After 1 p.m. Monday, before Tuesday’s close 1 p.m. Tuesday After 1 p.m. Tuesday, before Wednesday’s close 1 p.m. Wednesday After 1 p.m. Wednesday, Thursday’s close before 1 p.m. Thursday After 1 p.m. Thursday, Friday’s close before 1 p.m. Friday
If you have telephone switch privileges and you want a timing edge, make your trades as close to the 1 p.m. deadline as possible. But don’t cut it too closely: On a busy day, you might have trouble getting through to the fund company, especially within the last hour of trading.
