`Dear Investor: You have made a wise choice by electing to focus on 100 percent no-load mutual funds in making your mutual fund investment selections.”
So begins the investment guide issued by the 100% No-Load Mutual Fund Council, a trade group that has a point of view shared loudly by millions of investors.
But in today’s investment world, the idea that “no-load” translates into “superior” is both anachronistic and wrong.
These days, you can avoid loads–or sales charges–on some load funds and pay advisory fees for a portfolio of no-load funds.
Moreover, studies have shown that many factors determine a fund’s long-term superiority, and that loads are not necessarily one of them.
By focusing on sales loads, investors take their eye off the ball. Beginning this week and for the next two, this column will try to eliminate the confusion about the load/no-load issue.
“People worry more about the way they pay for a fund than about either how much they pay for the fund or what they get for their money,” says Don Phillips, president of Morningstar Inc. “If you focus in on one piece of the puzzle, you may never figure out what the big picture really looks like.”
No-load, or direct-marketed, offerings surfaced in the 1920s, but sales charges only became a hot topic in the late 1980s, when the number of people managing their own money skyrocketed.
Firms that sold funds directly to investors touted their performance–which was what could make an investor buy–and hyped the fact that good results were helped along because there was no sales charge of 3 percent to 8.5 percent.
On the heels of this kind of populist thinking, the load fund side of the business found new ways to cut the pie, offering sales charges that are collected upon redemption or over time, rather than upfront.
Throw in “12b-1 fees” for sales and marketing, and the terms “load” and “no-load” are virtually meaningless.
Funds without sales charges can levy small 12b-1 fees and legally be considered “no-load.” And load funds often are sold without fees, such as the no-transaction-fee mutual fund supermarket systems or in retirement plans.
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The supermarket systems, in turn, created a way for advisers to manage clients’ money in the best available funds, regardless of sales loads.
The advisers get paid a portion of the money they manage; it’s not a load, but you pay it regardless of whether the adviser buys load or no-load funds.
“It’s almost the same situation you have today when you want to get a car,” says Michael Lipper of Lipper Analytical Services, the New York data firm. “You can buy the car over the Internet, you can shop around or you can go to the local dealer. You can pay cash, you can buy it on time or you can lease it. No matter how you do it, what is most important is that the car gets you from point to point and meets your expectations.”
Truth be told, both load and no-load fund supporters each make good cases for their side and provide some type of numbers to support their position. Indeed, loads are a drag on performance, but no more so than high expenses. That’s why no-load funds do not dominate the performance charts.
So if loads are not the issue–and the vast majority of experts have long moved past this argument even if individuals haven’t–investors should examine the real issues. They are:
– Help versus no-help.
If load funds, on average, are likely to provide the same returns as a no-load fund during any given period–as shown in several studies–the choice comes down to “do-it-yourself” or “hire some help.”
“Advice is a growth business,” says Avi Nachmany of Strategic Insight, a New York firm that follows industry trends. “The question for an investor is do you need help or don’t you? If you do, the smart thing to do is to get it, but to find the way to pay for it that you consider the fairest.”
– The cost of ownership.
Say two funds invest in the same kind of assets. Both experience the same kind of returns, but one fund gives investors a bit more pocket money. Presumably, you’d want that fund, even if you paid a load to get it.
A load fund with low expenses can sometimes be cheaper to own than an average no-load fund. That’s why choosing the best fund means looking at a combination of management, assets and costs, not just sales charges.
“The whole scrambled field of fees and charges has confused the hell out of the customer,” says Irving L. Straus, president of the 100% No-Load Mutual Fund Council, based in New York City. “Loads may not be the issue anymore, but people must focus on what it is they are paying for.”
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NEXT WEEK: Why expenses matter more than loads.
Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at [email protected] or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.