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Fund Spy

That Load Fund Might Be Worth a Second Look

A strict division of the fund world into 'load vs. no-load' no longer applies.

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The article was published in the October 2018 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

Most investors understand the importance of keeping costs down. For this reason, load funds--those that charge a sales fee, typically an initial charge of 5.75% for the A shares of stock funds--acquired quite a stigma among do-it-yourself investors. Most simply wrote these funds off. That’s why the Morningstar 500, found in our publication Morningstar FundInvestor, aimed at individual investors, is over­whelmingly composed of funds without sales charges.

However, the load versus no-load dichotomy that defined the mutual fund universe in the 1990s and early 2000s, with entire fund companies assigned to one camp or the other, no longer applies. These days, many funds that thrifty investors mentally place off-limits may be available for purchase without paying a load.

One way to acquire such funds is by having an account with providers such as Fidelity or Schwab. The funds available on their extensive No Transaction Fee lists include most of the traditional load-fund giants such as American Funds, Franklin Templeton, MFS, and JPMorgan.

Another way to gain access to load funds without paying their hefty upfront fee is to invest with the help of a financial planner or advisor. True, that will add costs to the process; planners and advisors don't work for free. Do-it-yourselfers who are confident they can manage on their own shouldn't take this route. But many investors who once did without such assistance have migrated in that direction as their lives progressed and their financial issues became much more complex. Financial professionals who are paid directly by the investor rather than from fund sales charges often have access to institutional share classes with no sales charge, and which have lower expense ratios to boot.

Although the published minimum investments for these shares can be daunting--a $1 million stated minimum is common--in reality you don’t necessarily have to hit that target. Often advisors who have that scale among all of their accounts, or who simply have a long history doing business with the fund group in question, can gain access to the institutional shares for their clients without each investor having to pony up such a large sum.

Take a look at the asset base of the recently reopened  IVA Worldwide (IVWIX), a cautious offering that might appeal to prudent investors at a time when--despite recent declines--stocks seem richly priced to some observers. On the surface, IVA is a load shop, with its A shares charging a 5% purchase fee. But most shareholders don’t own the A shares; roughly three fourths of IVA Worldwide’s assets are in its I, or institutional, shares. Some of those assets came from institutions, but institutions have the option of working directly with IVA, separate from the publicly available mutual fund. A good chunk of the assets in the institutional shares--IVA estimates it's more than half--belongs to individuals investing though their planners or advisors. (I can vouch for that because I’m one of those individuals.)

Another way to own such funds is through company retirement plans. These plans often feature share classes without loads. Take one of the most prominent international funds,  American Funds EuroPacific Growth  (AEPGX). Thrifty investors who know their mutual fund history might immediately recognize American Funds as a “load shop” and automatically dismiss all of its funds as unworthy of their attention. But at the end of October, only $24 billion of American Funds EuroPacific Growth’s massive $147 billion asset base was in its A shares that charge a 5.75% front load. The overwhelming majority of assets resided in retirement share classes. These situations are not anomalies by any means.

However, note that the absence of a front load alone doesn’t guarantee a good deal. For example, some fund companies offer C shares in addition to A shares; C shares typically don’t have an initial purchase fee, or a charge to sell the shares (as the now essentially extinct B share classes did). But unlike institutional share classes, C shares have very high expense ratios. Partly for that reason, C shares have been steadily losing popularity among investors and fund companies alike. And while the expense ratios of institutional shares are generally substantially cheaper than other share classes, one still should compare funds against one another or other benchmarks. As with any other share class, some funds’ institutional shares might be relatively costly compared with rival funds' institutional shares.

The point here isn’t that funds from load shops are inherently better and that investors must therefore look for any way they can to get into them. Many funds carrying these sales charges deserve to be ignored. But plenty of funds that might show up as load offerings on an initial screen--or fund families that stingy investors might simply write off as a “load shop”--deserve a place on investors’ radar. The sales charge that appears for these funds might only apply to A shares bought outside of No Transaction Fee platforms. If you’re interested in such a fund, investigate further. You might find a pleasant surprise.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.