Load funds account for most assets, sales


August 29, 1993|By WERNER RENBERG

"I am told that no-load funds are the only mutual funds to buy because they have no sales fees," a Minneapolis reader says. "If no-loads are so great, why would anyone buy a fund with sales fees? Why are sales fee funds still around?"

Several readers have raised questions about no-load funds -- just as sales channels for them are being expanded via Charles Schwab and Fidelity's discount brokerage organization. You, too, may wonder whether no-loads are as desirable as they seem.

No-load funds, begun in 1928 by the predecessor of today's Scudder Income Fund, have allowed you to buy and redeem shares without paying a sales charge, provided you deal directly with their sponsors.

They put every dollar you invest to work for you in stocks, bonds, and other securities. And they're most popular with investors who are willing and able to manage their fund portfolios.

No-load fund shares also can be bought from financial planners, discount brokers, and other sales people. With some exceptions, such purchases may involve fees, however.

Load funds are usually sold by brokers, financial planners, insurance agents, and others under agreements with the funds' distributors, which commonly are affiliated with the management companies sponsoring the funds. Load funds also may be sold directly by sponsoring companies, such as Fidelity.

Sales loads can run to 5 percent or more when you buy shares -- or you might pay deferred sales charges when you sell. Most of the money goes to pay dealers and salespeople. (Funds with deferred sales charges are sometimes regarded, erroneously, as no-loads.)

Load funds are not merely "still around." They account for the largest share of total mutual fund industry assets and sales.

Why? Not because load funds necessarily outperform no-loads. Performance depends on how a fund is managed, not on how its shares are sold. You have excellent and mediocre management in both load and no-load funds.(When comparing their total returns, always be sure that the load fund results you use are adjusted for sales charges.)

Demand for load funds is due largely to two factors: Many people want advice in selecting funds and managing their fund portfolios, and are willing to pay a commission for it. Given the sizes of the loads -- which may exceed commissions on transactions in individual securities -- dealers have an incentive to push funds.

Another factor: Many investors are unaware of no-load funds. Such funds rely on advertising and promotion. If they spend too little -- and lack brokers to tout them -- they attract less cash than load funds.

Still, no-loads must make money somehow. How do they get revenue?

Funds earn investment income by collecting dividends and interest from the securities they've bought with shareholders' money. They also may realize more capital gains than losses when selling them. Net income and net capital gains must be paid to shareholders.

The management and distribution entities (as well as accounting and law firms, custodians, printers, and others who serve the funds) are paid out of the funds' gross investment income. Funds with 12b-1 plans also may tap fund assets to pay certain distribution expenses.

Fund costs are not hidden. Toward the front of the prospectus of any funds that you're considering, you should be able to find:

* A "shareholder transaction expenses" table telling you what, if anything, it costs to buy or sell shares or to reinvest dividends.

* An "annual fund operating expenses" table which must show you management and 12b-1 fees (if any), other expenses, and their total.

Shareholder reports list fund expenses by types and provide tables giving the ratios of operating expenses to average net assets.

Independent public accountants check whether fund expenses are properly reported and whether the data in various tables are consistent with one another. During their inspections, Securities and Exchange Commission examiners check the math, too.

The new Schwab and Fidelity discount brokerage programs, enabling investors to buy no-load funds without transaction fees, follow a period in which they had charged such fees for purchases of a number of no-loads. Schwab began its no-fee program in summer 1992 and expanded it in July -- about when Fidelity got into the act.

Both offer Berger, Dreyfus, Evergreen, Founders, Janus, Neuberger & Berman, SteinRoe, and Strong funds. Schwab adds Benham, Invesco, 20th Century, and others. Major holdouts: Scudder, Vanguard and Baltimore-based T. Rowe Price, which want to deal directly with their shareholders.

Fidelity and Schwab charge about 0.25 percent of assets annually for their services. Paid directly by the funds or indirectly out of their investment adviser's fee revenue, this shouldn't raise total operating expenses above the rates for shares bought from the fund sponsors.

Why would fund companies let rivals Fidelity and Schwab sell their shares? To tap new markets -- especially financial planners who use Fidelity or Schwab as their "back office" and investors who prefer one-stop shopping -- that can swell the assets on which they earn fees.

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