Investors eager to move out of a scandal-tainted fund family and into one that has not run afoul of regulators' ire face a predicament. If they've bought fund shares through a broker or financial planner and paid a sales charge, they will probably face fresh fees to open another load fund account. Either that, or give up the help of an adviser and adopt a self-directed approach with no-load funds.
But there is one fee-free way for investors to shift from one load fund family to another, a route that the fund industry doesn't trumpet from the rooftops. The method: a direct NAV, or net asset value, transfer.
This transaction allows investors to switch load fund families, avoid the commission, and buy into the new fund at the current NAV.
Direct NAV transfers are "a great option" for brokers and financial advisers who wish to move clients out of troubled fund families without imposing an additional sales charge, says Andrew de Curtis, vice president of sales for First Eagle Funds.
First Eagle, which manages five funds with a value philosophy and a global orientation, has seen such transfers rise since the fund scandals erupted last fall.
"With increased scrutiny from their compliance departments," Mr. de Curtis notes, "brokers have become more active in promoting NAV transfers as an accommodation to their clients." While a broker might lose an extra commission, he may gain more in client goodwill, he says.
Prominent among load fund families that offer NAV transfers: Oppenheimer, Calvert Group, Dreyfus Premier, First Pacific Advisors, Hotchkis and Wiley, Hartford, John Hancock, and Phoenix.
Funds that offer such a load waiver must disclose it in prospectuses or Statements of Additional Information, which investors often overlook because they are available only on request.
Load funds don't normally play up NAV transfers because they deprive brokers of any incentive to sell their products. On the other hand, they provide a way for smaller fund families to garner assets at a time when big load fund families such as Putnam and Alliance are experiencing high outflows because of regulatory scrutiny.
Brokers initiating NAV transfers must generally meet certain conditions. A key one is that new shares must be acquired from proceeds derived from liquidation of shares in another load fund, generally within 30 to 120 days of the purchase.
The money must then generally be invested in the accepting fund's Class A shares, which typically levy an up-front sales charge ranging from 4.75 percent to 5.50 percent of the amount invested.
The purchase application must also be accompanied by a copy of the redemption transaction. It doesn't matter whether the liquidated shares are Class A shares, where a sales charge was paid upfront; Class B shares, which involve a contingent deferred sales charge; or back-end load C shares.
In most cases, the transfer has to be arranged through a broker who has a distribution agreement with the fund. But a handful of companies, including Oppenheimer, Calvert Group, and Hartford, are permitting individual investors to execute NAV transfers on their own, without a financial intermediary. In such cases, investors may be able to designate a new "broker of record," and establish a fresh advisory relationship.
Some fund families are now using NAV transfers "opportunistically" to attract assets from tarnished rivals, says fund consultant Burton Greenwald of B.J. Greenwald Associates.
In certain cases, he says, fund companies are rewarding brokers for going through the paperwork hassle of opening the new accounts with financial incentives that may fatten a fund's expense ratio.
Dreyfus Premier Funds, sold through brokers, banks, and financial planners, are an example. An NAV transfer into Dreyfus's popular Premier Global Growth Fund's Class A shares would waive an upfront sales charge of 5.75 percent. But a broker might also select the same fund's "T" shares in order to earn a 0.5 percent annual trailing commission.
That choice would be less favorable to the investor, since the T shares' expense ratio of 1.50 percent is higher than the A shares' 1.32 percent ratio, according to fund tracker Morningstar Inc., lowering the net return to investors.