Mutual funds shift their loads to compete
Until a few years ago, about half of the mutual funds were ``no-load'' and did not have a sales commission. The other half were ``load'' funds, and charged a commission, usually as much as 8 percent. Today, more than three-fourths of the funds are sold with a load. Some funds that never had a load have added them, while others have cut their sales charges or brought out new funds with lower loads. Many of today's loads are only 2 percent, but that's enough to give these funds an advantage over the no-loads.
The advantage is marketing. With a load, a fund can spend more on advertising, direct mail solicitations, and commissions for brokers, investment advisers, and financial planners. That leaves many of the no-loads - especially the smaller ones - to depend on small ad budgets, performance lists in newspapers and magazines, and word of mouth for new investors.
`I think some funds feel like they're getting lost in the shuffle,'' says John Markese, director of research at the American Association of Individual Investors. ``They have to communicate in a very competitive environment.''
For some of these funds, which once carried their no-load status aloft like a badge of honor, that has meant adding a sales charge. The G.T. Global Growth Funds in San Francisco, for example, are adding a 4 percent fee. And last year, two no-load funds with excellent long-term records - Weingarten Equity and Constellation Growth - were acquired by AIM Management and now carry 4 percent loads.
At the same time, in a development that may make things even more difficult for no-loads, several funds that charged the full 8 percent load for many years are either cutting their sales charges or developing entire new groups of funds with ``low loads'' of 2 or 3 percent.
In April, the Keystone Group in Boston introduced Keystone America, a family of seven new mutual funds with a 2 percent front-end load. The funds also have a 12b-1 charge, named after a Securities and Exchance Commission ruling that allows a fund to spend a small percentage of assets on marketing and distribution.
Keystone's move came just a few months after a similar introduction by Massachusetts Financial Services, also in Boston. On Jan. 1, the company brought out its Lifetime Series of nine funds. Instead of a front-end sales charge, investors pay an annual fee of 1 percent of assets, and they are subject to a ``declining contingent deferred sales charge'' if they sell any shares within the first six years, says Claude G. Thomas, president of MFS Financial Services, the sales group for Mass Financial.
Both groups of new funds pay commissions to brokers, but most of this money isn't coming out of the funds themselves. Both fund companies are owned by much larger financial service companies - Keystone by the Travelers Group and Mass Financial by the Sun Life Assurance Company of Canada - whose ``deep pockets'' can be tapped to help pay the commissions.
``This would have been impossible without a strong parent,'' says George Bissell, chairman of Keystone.
The lower loads, Mr. Bissell and other fund executives say, have won wide acceptance among brokers who, like the folks at K mart, have found that lower prices mean higher volume. At the same time, funds that used to be stridently no-load have found a 2 or 3 percent sales charge is tolerated by investors who are also getting the professional advice of a broker or financial planner.
Still, some funds have stuck to their no-load guns. ``We don't feel we're at a disadvantage at this point,'' says Steven Norwitz, vice-president of the T.Rowe Price group in Baltimore. ``Our advertising budget has increased substantially in recent years, but we're funding it out of our management fees.''
Like most no-load funds, T.Rowe Price takes 0.75 percent of assets to pay management fees and all other expenses. Management fees range from 0.125 percent to 1.5 percent, though something closer to 1 percent is more typical.
Mr. Norwitz sees some problems in the multi-directional shift in loads. ``What does concern us is that it tends to confuse the marketplace,'' he says. ``People may start thinking every fund is imposing charges one way or another.''
That, of course, is not the case.
There are still many funds that do not impose a front- or back-end loads, or 12b-1 fee. If you are comfortable selecting a fund on your own, there's no reason to pay a load. Several studies have found no difference in the performance of load and no-load funds, but a load can erode the net return.
``I'm always willing to pay a load if I know my net performance is going to be above the trend,'' Mr. Markese says. ``But you never know that in advance, so it's better to start without a load.''
On the other hand, investors who need or want the guidance of an investment professional can now select from a much wider range of mutual funds where sales charges of 2 to 4 percent are low enough to be overcome by decent performance in a fairly short time.
Before investing, read the prosepctus and find out exactly what the charges are. Don't assume that just because a fund has a 2 percent front-end load, that's the end of it. Any fees ultimately reduce your total return, but a small, one-time commission may be a fair price for the right fund for your financial needs.