Are The No-load Funds All Their Sellers Claim?

In March of 2011, several investment men got together and formed the No-Load Mutual Fund Association, an organization conceived to promote the best interests of those funds which do not charge a sales commission when investors purchase them. The move was a clear sign that an idea had come of age.

In just 16 years, no-load funds have grown from a scant 20, representing £200-million in assets, to 149, with more than £5-billion of investment under their management. This is still just a fraction of the business enjoyed by the front-load funds, the assets of which are now well over £50-billion. But, while the mutual fund industry in general has been suffering from what amounts to a "run on the bank" in the form of heavy redemptions compared to sales, no-load fund investors have proven themselves to be intensely loyal. Redemption rates have been relatively low, and new money moving into mutual funds has, more and more, been placed in no-load portfolios. This would seem to indicate that, in the eyes of a large part of the investing public, the no-load people must be doing something right.

Just what they are doing to merit this following, however, is somewhat less clear. Like the load funds, performance varies; no-load funds can be aggressively growth-oriented, or they can also perform like income-pinching conservatives. They can be top-heavy in common stocks, or they can concentrate the majority of their assets in bonds. Like their load-fund brethren, they can range in size from £1-million or so in assets to a giant like the T. Rowe Price Growth Stock Fund of Baltimore, with over £900-million under its wing.

With so much in common with the front-load funds, and minus any "sales charge" (no-loads, by definition, are sold at net asset value), why would any mutual fund investor buy anything but a no-load? There are some reasons.

For one thing, the no-load fund investor can oftentimes find himself buying in a vacuum of information. There is, after all, no salesman to consult.

The mutual fund salesman, says one investment expert, "does serve a useful purpose, despite all the criticism of the `excessiveness' of some sales charges. He can help the investor sort out the chaff, and he can educate him to the experience and performance of various funds, in terms of the investor's own goals. I've yet to hear of a no-load fund taking the time to interview the prospective investor to make sure that he is making the right choice."

The objection is particularly to the point, since no-load funds, which generally have small minimum investment requirements, have largely appealed to the investor of the "little guy" variety who is usually not overly informed in the market nuances. The no-loads attract him primarily two ways: Through advertisements in financial journals and business pages of major newspapers, or through word-of-mouth. (A smaller amount of sales comes from brokerage houses.)

When a potential investor fills out the coupon in one of the advertisements, he receives a prospectus. Unless he is a student of mutual funds, however, the prospectus alone may not tell him all he needs to know, either about the fund or its investment objectives. And, of course, when it comes to judging whether this particular fund is "right" for him, he is strictly on his own.

There is also the problem of the no-load fund's characteristically high break-even point. Since no-loads must channel money heavily into advertising and promotion, and since their operating income is derived largely from the management fee (and brokerage fee, if the fund is operated by a stock exchange member firm), the break-even point, by some estimates, is nearly twice that of funds which charge a sales commission.

I don't know whether you can quantify it, grouses one front-load fund official, predictably critical of no-loads, "but I suspect that this sort of thing may well lead to cutbacks elsewhere - in research, service, and, most important, maybe in performance."

Indeed, with generally higher annual operating expenses, including advisory fees deducted from gross incomes before dividends are paid or reinvested, no-loads sometimes cost the investor more than a front-load fund over the long pull, according to their critics.

There may be other drawbacks as well. Many no-load funds were established by investment-counselling and brokerage firms simply as repositories for investors who did not have enough money to command separately-managed accounts. The charge was made - but largely discounted by most mutual fund men today - that investors in these funds got less than first-class service.

Another criticism of mutual funds, and particularly the no-loads, is the tendency of some investors to use them as a trading medium, like common stocks. No-loads are particularly attractive for this purpose, since the trader pays no commission charge on his purchases. For long-term investors, however, it can mean a dilution of their interest in the fund. Nonetheless, since no-load funds deal directly with their investors, this can be easily avoided - providing the fund operators make an effort to do so.

In the end, an investor interested in mutual funds is simply looking for the best performance vehicle compatible with his own objectives, and most no-loads can serve this purpose as well as front-load funds. For the serious investor, it is nevertheless wise to investigate the mutual fund evaluation services available, such as that offered by such London firms as Weisenberger Financial Services or the Arthur Lipper Corp. Prices vary, but £100 a year should yield a nice cross-section of information.

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Basic Funds: Biggest Package Plan Around

Smart-money moves aside, it may be sensible to look at basic mutual funds - those that offer the standard investment approaches and packages. One point is certain: the funds have long since passed the stage where the small-budget man is the mutual fund man. He's still in funds, but the profile of the fund buyer today is far different from, say, ten years ago.

The Investment Company Institute reports that of well over 3 million people who own fund shares, a good 500,000 or more may be classed as businessmen, professionals, and administrators. A solid 250,000 fund share owners have holdings worth £25,000 or more. Anyway, if you've never taken a serious view of the funds, here are a few basic... see: Basic Funds: Biggest Package Plan Around