"Of Mutual Interest"-Loaded Mutual Funds
Tuesday, October 09, 2007SUSIE GHARIB: There has been a longstanding feud in the mutual fund industry between funds that carry a sales charge or load, and those that don't. Even though loaded funds cost more, they're surging in popularity. Erika Miller explains why in today's "Of Mutual Interest" segment.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Go into any supermarket and it's clear how much items cost. It's a lot harder to figure out the cost of mutual funds. Some funds are "loaded" funds -- sold through financial planners and charging a sales fee. This can be a front end load paid at the time you invest, a back end load charged at the time you redeem, or a level load with an annual servicing fee. Loads vary greatly, but can run as high as $0.08.5 on every dollar invested. Richard Knott, executive vice president at Oppenheimer Funds, says paying a load is often a wise long-term strategy.
RICHARD KNOTT, EXEC. VICE PRESIDENT, OPPENHEIMER FUNDS: It's just like if you're a golfer on the weekends. You wouldn't think that just because you golf on the weekends, you can go out and play against Tiger Woods and win. People in certain professions have higher skills, higher talents, greater experience, greater training, which is why they're called a professional in that field.
MILLER: No-load funds on the other hand are sold directly to investors, so there's no commission. Baltimore-based T. Rowe Price built its business that way. The company's chairman of mutual funds, Edward Bernard, says saving money is not the only advantage.
EDWARD BERNARD, CHAIRMAN, T. ROWE PRICE MUTUAL FUNDS: The other benefit that independently oriented investors see from investing directly is the fact that they actually prefer to have a sense of control over their own investment decisions. So they want to do the research. They want to do the homework.
MILLER: The market decline from 2000 to 2002 and the bursting of the dot-com bubble made many investors wary of the do-it-yourself route.
KNOTT: I think a lot of people realized during the crash that geez, I can't do it on my own. I can't learn all the avenues that are out there for me to invest in. I'm not well diversified. Maybe I don't have a good asset allocation strategy. And maybe I'm more invested for the short term than the long term, which is where an advisor can really help you out.
MILLER: According to Lipper, over the past five years, the number of loaded funds in the U.S. has increased more than 50 percent to 3,600 funds today. The number of no-load funds has risen just 30 percent in that time frame to about 1,500. But Lipper mutual fund analyst Tom Roseen says over the last two decades, no load funds have typically outperformed loaded ones.
TOM ROSEEN, MUTUAL FUND ANALYST, LIPPER: Obviously the load funds, especially the front end load funds, eats up a great deal of your return. I've done this over five and 10 year periods and I've done it over last six years in a row that I've been doing it, so we had kind of rolling periods. And each time, loaded funds underperformed the no-load funds.
MILLER: As an example, he says over the past five years, equity load funds have had a total annualized return that was 0.8 percent less than equity no load funds and that doesn't even take into account the impact of the load. The difference between the two groups may not seem like a lot, but it can add up over time. According to Lipper, paying an extra 1 percent on a $10,000 investment typically means sacrificing thousands of dollars each decade. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
