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John Waggoner: A Shares Live On, Despite Some Hefty Upfront Sales Charges
PS: Now that I've done my smart ass bit, here's something substantive to at least consider:
IMHO - the biggest single threat to investing in actively managed open-ended mutual funds is the potential for massive investor inflows and outflows - usually at the worst possible time. @JoJo26 very recently alluded to this problem in a different thread assessing the underperformance of a particular fund. These (What have you done for me lately?) inflows and outflows harm longer term stay-put investors.
Going one step further ... If it could be demonstrated that those investors who have paid an initial front load to own a fund are more inclined to stay with that fund for the longer term (a less fickle bunch), than there may be an unperceived benefit to the load. I don't know whether that's the case or not, and it would seem nearly impossible to document. Worth considering in the broader context however (IMHO).
Two of my lonest holdings (and now largest) since my teenage years (better than fifty) have been AMECX and FKINX. Looking back ... I'd invest in them again as since high school (mid 60's) my return has been better than eighty to one plus some change to my pocket. Also, I have found, once ones pays the up front sales load they are free to do nav exchanges within the respective family of funds to other family funds without any additional cost plus Morningstar estimates on my wad of now 46 funds my overall annual expense ratio computes to only 0.87% on invested assets. In addition, I have no brokerage account wrap fees to pay so indeed this has been a low cost way for me to invest, through the years, as compared to some other investors that I know.
One of the best ways I found to reduce the sales load, years back, was to buy a bond fund with a lower sales charge and then latter on do a nav exchange to a stock or balanced fund.
Although some have said that they would never pay a sales load I'm thinking they might pay brokerage account wrap fees (which I'd never do).
For me ... swinging free ... as they saying goes. Sorry, to read, that for some of you, you might be in a twaught over sales loads.
Of course there are lots of A shares offered load-waived at various brokerages -- even a few of the ones Wagg features in the article are LW at Fidelity.
@Old_Skeet-when you paid the lower sales charge on the bond funds, did the brokerage ever charge you the higher sales charge when you moved into the stock funds? I know I wish I had been willing to pay the 5% sales charge on SGENX in 1993.
No, I was never charged an additional sales charge that I remember. This is not to say all my purchases were in bond funds which got moved to equities. The way I learned to do this was through a seasonal investment strategy where during the late spring I'd do some nav exchanges from equity funds to bond funds. During the summer months I'd buy more of the bond type funds; and, then come fall I'd move some back to the equity type funds. Nothing was ever said, to me, nor was I charged any additional commission and/or fees to do these nav transfers other than the commission I paid when additional shares of the bond or stock funds were purchased. With this, I started to purchase more bond funds than equity funds and made portfolio adjustments through more and more nav transfers from bond funds to equity funds. And, I did this for a good number of years. Now, in retirement I am doing less and less new purchases; however, I am moving a good bit of money from all equity funds to some hybrid type funds (over time) rather than to bond funds. I am wanting to grow my footprint in hybrid funds by about one percent per year while reducing all equity fund holdings by a like amount. Currently, about 20% of my portfolio is in cash and cds, about 10% in bond funds, about 45% in hybrid funds and the remaining 25%, or so, in equity funds. When Xrayed this produces an asset allocation of about 20+% cash, about 30% domestic equity, about 20% foreign equity, about 25% bonds and about 5% other. Notice I used the word "about" a good bit because the percentages are rounded to the nearest 5% whole number. As the equity allocation contines to grow I periodically rebalance and move some equity money to hybrid money through nav exchanges. In doing this the hybrid type funds generally have a broader investment universe that they can invest in over other fund types giving the hybird fund manager leadway within ranges, of course, to position into assets classes they feel will offer the better returns and/or offer a more complete investment package. This makes my overall portfolio more adaptive to the ever changing investment environment more automatic whether due to seasonal trends and/or investment activity in the markets by other investors relative to positioning.
For me, one of the better benefits for A share investors is the ability to do nav exchange transfers without paying additional sales charges. I believe the level load funds many classified as T shares do not offer the free nav exchange transfer option.
I hope this somewhat lengthy answer is helpful to understand how and why nav exchanges were made along with cost associated, for me, with these nav transfers.
Sorry old-timers ( and I say that thinking of myself as one), but in today's world @JoJo26 is exactly right. With all the options available, there is no fund in existence I would pay a fee for today. Maybe in the 60s, 70s or even 80s when A-share fees were an acceptable practice with limited supply of alternative choices, well in that case you do what you have to do. But that is not the case today. And I say that because most big investment supermarkets like Fidelity and Schwab eliminate fees for A shares. Also, there are absolutely no guarantees any fund will perform well enough against it's peers, which are many, or an index to win you your money back.
Sorry old-timers ( and I say that thinking of myself as one), but in today's world @JoJo26 is exactly right. With all the options available, there is no fund in existence I would pay a fee for today. Maybe in the 60s, 70s or even 80s when A-share fees were an acceptable practice with limited supply of alternative choices, well in that case you do what you have to do. But that is not the case today. And I say that because most big investment supermarkets like Fidelity and Schwab eliminate fees for A shares. Also, there are absolutely no guarantees any fund will perform well enough against it's peers, which are many, or an index to win you your money back.
@Old_Skeet: Was all this transferring of shares taking place in retirement accounts? I'm thinking that in non retirement accounts buys & sells only. Is my thinking wrong ? Thanks, Derf
Not all the nav transfers were in retiremnt accounts as ira accounts were not available (I believe) until sometime in the 80's. And, I started investing during my early teenage years around 1960. Therefore, some nav transfers were subject to capital gain taxation on profits.
First, we have not been front or back loaded fund investors, and have never used an advisor. I recall discussions with a friend back in the early 80's about an investment club he helped organize and they were going to use a local Merrill-Lynch broker/office. Others here or you may help with this; but I recall some of the mutual funds under consideration with ML had loads as high as 8%. Is this accurate from the early 80's? We steered all of our personal investments to Fidelity and never had any investments with the big money houses of the day with the front/rear loaded funds. Note: for the newer investors, Fidelity did have loads on some funds (3%) and I have a list stashed away somewhere in a filing cabinet from the way back days.
Secondly, a question about your loaded fund investments; at least your long ago initial purchases.
A presumption on my part of how the front loads may work: Example: Fund "x" has a front load of 5%. I will presume at some monetary level one no longer pays any load to add more money to the "same" fund? I'm guessing at levels, but perhaps the first $2,500, $5,000 or $10,000 of monies has the full load and then the load is no longer, yes? The only clear status of the loads that I understand is payment, at least in part; to a/the firm and/or an advisor for their work. Anyway, would appreciate your description of how this works or did work. Regards, Catch
Since, your question references back many years know at the time I was in my early teenage years. Here is how I remember things. The two fund families that I had investments in were Franklin and American Funds with the two first funds being FKINX and AMECX. Latter on as I aged into my mid teens I begin to build the number of yards I serviced during the summer months cutting grass. At this time I began to pay more attention as to how my father moved some of his money around from time-to-time (seasonal strategy). Most of his money was invested in stocks and bonds but he did hold a couple of mutual funds he used to play the seasonal strategy. This is where he'd make seasonal shifts between the stock fund and his bond fund. With this, I started doing the same and started purchasing bond funds during the summer and did as he did moving some of it to stock funds during the fall, winter and early spring. I still do this today with part of my portfolio. I remember, my father saying that the bonds funds cost less to buy than the stock funds but I should buy some of each along the way when I had the money. Since, I had the money during the summer months ... I purchased mostly bond funds although I did buy some stock funds as well.
Then ... you guessed it ... I followed the seasonal strategy that I learned form my father and started moving money between my bond fund and stock fund through nav exchange transfers based upon the calendar. And, through the years I learned more strategies and thus the number of mutual funds owned grew along with my asset base.
I don't remember the exact year that I had to start filling income tax returns but it was before I entered college.
Comments
Regards,
Ted
PS: Now that I've done my smart ass bit, here's something substantive to at least consider:
IMHO - the biggest single threat to investing in actively managed open-ended mutual funds is the potential for massive investor inflows and outflows - usually at the worst possible time. @JoJo26 very recently alluded to this problem in a different thread assessing the underperformance of a particular fund. These (What have you done for me lately?) inflows and outflows harm longer term stay-put investors.
Going one step further ... If it could be demonstrated that those investors who have paid an initial front load to own a fund are more inclined to stay with that fund for the longer term (a less fickle bunch), than there may be an unperceived benefit to the load. I don't know whether that's the case or not, and it would seem nearly impossible to document. Worth considering in the broader context however (IMHO).
Two of my lonest holdings (and now largest) since my teenage years (better than fifty) have been AMECX and FKINX. Looking back ... I'd invest in them again as since high school (mid 60's) my return has been better than eighty to one plus some change to my pocket. Also, I have found, once ones pays the up front sales load they are free to do nav exchanges within the respective family of funds to other family funds without any additional cost plus Morningstar estimates on my wad of now 46 funds my overall annual expense ratio computes to only 0.87% on invested assets. In addition, I have no brokerage account wrap fees to pay so indeed this has been a low cost way for me to invest, through the years, as compared to some other investors that I know.
One of the best ways I found to reduce the sales load, years back, was to buy a bond fund with a lower sales charge and then latter on do a nav exchange to a stock or balanced fund.
Although some have said that they would never pay a sales load I'm thinking they might pay brokerage account wrap fees (which I'd never do).
For me ... swinging free ... as they saying goes. Sorry, to read, that for some of you, you might be in a twaught over sales loads.
Old_Skeet
Thanks @carew38 for the question.
No, I was never charged an additional sales charge that I remember. This is not to say all my purchases were in bond funds which got moved to equities. The way I learned to do this was through a seasonal investment strategy where during the late spring I'd do some nav exchanges from equity funds to bond funds. During the summer months I'd buy more of the bond type funds; and, then come fall I'd move some back to the equity type funds. Nothing was ever said, to me, nor was I charged any additional commission and/or fees to do these nav transfers other than the commission I paid when additional shares of the bond or stock funds were purchased. With this, I started to purchase more bond funds than equity funds and made portfolio adjustments through more and more nav transfers from bond funds to equity funds. And, I did this for a good number of years. Now, in retirement I am doing less and less new purchases; however, I am moving a good bit of money from all equity funds to some hybrid type funds (over time) rather than to bond funds. I am wanting to grow my footprint in hybrid funds by about one percent per year while reducing all equity fund holdings by a like amount. Currently, about 20% of my portfolio is in cash and cds, about 10% in bond funds, about 45% in hybrid funds and the remaining 25%, or so, in equity funds. When Xrayed this produces an asset allocation of about 20+% cash, about 30% domestic equity, about 20% foreign equity, about 25% bonds and about 5% other. Notice I used the word "about" a good bit because the percentages are rounded to the nearest 5% whole number. As the equity allocation contines to grow I periodically rebalance and move some equity money to hybrid money through nav exchanges. In doing this the hybrid type funds generally have a broader investment universe that they can invest in over other fund types giving the hybird fund manager leadway within ranges, of course, to position into assets classes they feel will offer the better returns and/or offer a more complete investment package. This makes my overall portfolio more adaptive to the ever changing investment environment more automatic whether due to seasonal trends and/or investment activity in the markets by other investors relative to positioning.
For me, one of the better benefits for A share investors is the ability to do nav exchange transfers without paying additional sales charges. I believe the level load funds many classified as T shares do not offer the free nav exchange transfer option.
I hope this somewhat lengthy answer is helpful to understand how and why nav exchanges were made along with cost associated, for me, with these nav transfers.
JoJo, I'm with you.
Thanks, Derf
Not all the nav transfers were in retiremnt accounts as ira accounts were not available (I believe) until sometime in the 80's. And, I started investing during my early teenage years around 1960. Therefore, some nav transfers were subject to capital gain taxation on profits.
Skeet
First, we have not been front or back loaded fund investors, and have never used an advisor. I recall discussions with a friend back in the early 80's about an investment club he helped organize and they were going to use a local Merrill-Lynch broker/office. Others here or you may help with this; but I recall some of the mutual funds under consideration with ML had loads as high as 8%. Is this accurate from the early 80's?
We steered all of our personal investments to Fidelity and never had any investments with the big money houses of the day with the front/rear loaded funds.
Note: for the newer investors, Fidelity did have loads on some funds (3%) and I have a list stashed away somewhere in a filing cabinet from the way back days.
Secondly, a question about your loaded fund investments; at least your long ago initial purchases.
A presumption on my part of how the front loads may work:
Example: Fund "x" has a front load of 5%.
I will presume at some monetary level one no longer pays any load to add more money to the "same" fund? I'm guessing at levels, but perhaps the first $2,500, $5,000 or $10,000 of monies has the full load and then the load is no longer, yes?
The only clear status of the loads that I understand is payment, at least in part; to a/the firm and/or an advisor for their work.
Anyway, would appreciate your description of how this works or did work.
Regards,
Catch
Thanks for your inquiry.
Since, your question references back many years know at the time I was in my early teenage years. Here is how I remember things. The two fund families that I had investments in were Franklin and American Funds with the two first funds being FKINX and AMECX. Latter on as I aged into my mid teens I begin to build the number of yards I serviced during the summer months cutting grass. At this time I began to pay more attention as to how my father moved some of his money around from time-to-time (seasonal strategy). Most of his money was invested in stocks and bonds but he did hold a couple of mutual funds he used to play the seasonal strategy. This is where he'd make seasonal shifts between the stock fund and his bond fund. With this, I started doing the same and started purchasing bond funds during the summer and did as he did moving some of it to stock funds during the fall, winter and early spring. I still do this today with part of my portfolio. I remember, my father saying that the bonds funds cost less to buy than the stock funds but I should buy some of each along the way when I had the money. Since, I had the money during the summer months ... I purchased mostly bond funds although I did buy some stock funds as well.
Then ... you guessed it ... I followed the seasonal strategy that I learned form my father and started moving money between my bond fund and stock fund through nav exchange transfers based upon the calendar. And, through the years I learned more strategies and thus the number of mutual funds owned grew along with my asset base.
I don't remember the exact year that I had to start filling income tax returns but it was before I entered college.
There you have it as I remember it.