Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Perhaps there is more to this story beyond: "Vanguard Group, now the largest U.S. fund company, has seen its fortunes soar as investors and advisers gravitate toward its signature offerings—index funds, including in the form of exchange-traded funds. But American Funds' star has dimmed as those same buyers shy away from its core stock products."
Vanguard has historically been investor friendly. I suspect the number of no load offerings at Vanguard is higher than American. American aggressively hawks its funds to class room teachers and other well intended but unsuspecting working class folks, unaware that 5.75% load comes off the top of every dollar they deposit...and of better no load alternatives.
"(July 01, 2011) SEC Sides with American Funds Against Finra. It took six years, but, thanks to the SEC, Capital Group just defeated a $5-million attack from the NASD, now called Finra. Last Friday the commission overturned [the] Finra finding."
Includes links to the ruling, and to M*'s take on it.
I tend to view Vanguard and American Funds as more similar than different. As Desota notes, they are each the low cost leader on their respective sides of the load/noload fence. They both tend to be rather stodgy families that are slow in introducing products (where's that international bond fund?) slow to work with evolving sales channels (Vanguard playing catch up with ETFs, slow to adopt online trading), etc.
Reply to @perpetual_Bull: Thanks, I did not realize...but not surprised. Dissapointed though that Morningstar appears to call no attention to any regulatory issue.
American Funds American Mutual A AMRMX, for example, rates Gold for all five of Morningstar's pillars. Here is Parent Pillar assessment:
No reference of the censure described in the LA Time article: "An appeals panel of the Financial Industry Regulatory Authority, the self-policing agency of the securities business, upheld the group’s three-year-old case alleging that the sales arm of L.A.-based American Funds broke industry rules in rewarding brokerages that sold its funds to investors."
And under stewardship, Morningstar gives an "A" overall, but remains "Neutral" on regulatory part:
Thanks again perpetual_Bull for shedding light on this topic.
Reply to @msf: Man, you guys are good. So, if you dig deep enough, Morningstar is aware of the regulatory issue, which was over-ruled by SEC in 2011.
My negative experience with American's sales tactics of their loaded funds to young professionals is first-hand. I do not view them anywhere near as investor friendly as Vanguard.
One may suppose they (Am.Fds) should have no ER's, after the loads have been placed. Pretty hefty amount of money (load) to remove, especially from, a young investors pocket. Reminds me of the wayback days when Merrill, E.F. Hutton and related had the big load mutual funds. Vanguard and Fidelity helped blow them out of the water for such charges.
I'm sure you know that loads get paid (mostly) to the sales people, who are not American Funds employees. They're the people you're referring to at Merrill, etc. But since you mentioned it ...
Back in the days when Merrill, etc. had big load funds, Fidelity also charged loads, though they called them "low" loads. As I recall, it was 2% front, plus 1% back (not contingent deferred) on FGRIX (and their growth and income funds in general), and 3% front end on FCNTX (and their growth funds in general, excepting dogs like Trend). And 100% of these loads went into Fidelity's pocket.
It was only in the early 90s(?) that Fidelity started waiving loads for IRAs, and the mid 90s(?) when they dropped their low loads altogether. And let's not forget the big load Fidelity Advisor funds.
Regarding expense ratios, I've tried to pair up American Funds (A class) with corresponding Fidelity funds (using M* categories and screener). What I see is that for the vanilla categories (Large Growth, Blend, Value), American Funds are noticeably cheaper. For bond funds (except junk), Fidelity wins, because it instituted a policy of 0.45% ER on most of its bond funds. Fidelity also wins on most balanced fund categories. American wins on World Alloc, World Stock.
Aggressive Alloc: Am Funds G&I Port 0.87%, Fid Asset Mgr 85% 0.80% - Fidelity wins Conserv Alloc: Am Funds Inc Port 0.87%, Fid Asset Mgr 20%-40%, 0.54%-0.63% - Fidelity Emerg Mkts: Am Funds New World 1.02%, Fid Emerg Mkts: 1.01% - tie For Large Bl: Am Funds Euro Pac & Intl G&I 0.84%-0.88%; Fid Div Intl, Overseas 0.87% - 0.92% - tie High Yield: Am Funds Hi Inc 0.67%, Fid Hi Income 0.76% - American Interm Gov: Am Funds US Gov 0.61%; Fidelity (all) - 0.45% - Fidelity Interm Term: Am Funds Bond Fund America 0.60%; Fidelity (all) 0.45% - Fidelity Large Bl: Am Funds Fundamental Inv, Inv Co America 0.61%-0.63%; Fidelity (excluding index, quant) are higher - American Large Gr: Am Funds Growth Fund Amer 0.68%; Fidelity (excluding index, quant, Magellan) are higher - American Large Val: Am Funds Amer Mutual, Wash Mutual 0.62%; Fidelity (excluding index, quant) are higher - American Moderate Alloc: Am Funds Am Balanced 0.62%, Fid Bal/Puritan 0.60% (but Asset Mgr funds 0.69%-0.76%) - American Muni Calif: Am Funds Tax-Ex CA 0.64%; Fid Cal Muni 0.46% - Fidelity Muni Nat Interm: Am Funds Ltd-Term Tax-Ex 0.60%, Fidelity Interm Muni 0.40% - Fidelity Muni Nat Short: Am Funds Sht-Term Tax-Ex 0.60%, Fid Short-Interm 0.48% - Fidelity Muni NY Long: Am Fund Tax Ex Fund NY 0.67%, Fid NY Muni Inc 0.47% - Fidelity Muni Single State Long: Am Funds Tax Ex MD/VA 0.65% - 0.67%, Fidelity 0.48% - 0.55% - Fidelity Short Term Bond: Am Funds Interm Bond/ST Bnd Fund Amer 0.60%-0.63%; Fid Short Term Bond 0.45% - Fidelity World Alloc: Am Funds Cap Inc 0.61%, Global Bal 1.08%; Fidelity Global Bal/Glob Strat 1.04% - American World Stock: Am Fund Cap World/New Perspective 0.77%-0.79%; Fid WorldWide - 1.05%
(I ignored target date funds, as the ER listed appeared to be just for the wrapper fund of funds, and not the total ER.)
Not to labor the point as it seems the verdict's been in for many years - paying a load for a mutual fund is unnecessary & unwise. I'll hasten to add however - if you're going to pay a load, earlier is better than later. The load being on a lower share price should cost you less out of pocket. In addition, you have a longer time frame to recoup your expense and to profit from whatever attributes drew you to the fund in the first place.
Would you pay 5% of an asset to be assured that you'd never pay taxes on the income it generated? Sure you would, if you expected that asset to generate more than, say 20% in income over its lifetime (figuring a 25% tax bracket; 25% * 20% = 5% savings in taxes).
So if your company had a Roth 401K plan that used load funds (no waiver), I dare say you'd use it (or take the deduction now, if you felt you'd come out even better).
If you were seeking, and found, an honest advisor who gave you the choice of paying 5% up front or 1%/year for as long as you worked with the advisor, which would you pick? Maybe I'm being a little generous here, assuming that there are honest advisors who work on commission. And I'm also assuming that advice (even honest advice) has any value.
Just as the SEC warns that a recurring 12b-1 fee can cost you more over time than a front end load, so can a recurring AUM fee over time cost you more than a front end load.
I'm not disagreeing that given the choice between a load fund and a no load fund, all else being equal (e.g. that you have both available, that selecting one over the other won't affect other fees you're paying, that the funds are otherwise comparable), pick the no load every time. It's just that sometimes you don't have that alternative - as with the 401K example, or when you're going to pay for advice one way or another.
Reply to @msf: Notice I scrupulously avoided saying "always." (-: In addition to your exceptions, sounds like AF runs very good funds with very low ERs, so (at least in some's opinion) may represent another exception ... I'm not unalterably opposed to loads. In 70s & early 80s our only shelter at work was a plan from Templeton. At that tender age, needed the hand-holding of the commission based "advisor". (96% invested sure beats 100% squandered). Some of these guys do render a service of sorts.
SAMPLE: "I only know from my own personal experience, and I personally feel that there's a cyclical nature to things, so you don't want to start making generalizations about how bad things have become in comparison to the old days."
Reply to @msf: Excellent points. When we were very young and beginning to invest it soon became obvious that we were completely unequipped for this discipline. We were fortunate to find an honest adviser, and with American Funds we helped put his kids through college on that 4.5% up-front load. He's also been a great help to us in a number of ways over the years, and I have no regrets regarding his up-front spiff. The funds that he put us into did what he said they would, and did and do in fact have very reasonable ERs.
We had long had a money-market fund, Capital Preservation, with the Benham group. The Benham funds were sold to American Century at some point, and we watched closely and found that the new company did continue to run this fund without significant change, as promised. This led us to explore other American Century funds, and we found some funds similar to those of American Funds, also with low ERs, but with no load. Using the American Funds experience as a template, we gradually extended our investments with American Century, continually comparing the relative performance. For the most part, we used American Funds for IRAs, and AC for non-IRA.
Then we discovered FundAlarm, with it's great ability to compare equity fund performance, both against other funds and against a benchmark. We did this about once a month, and gradually became confident enough to move into and out of different funds based upon their performance.
We have learned many things from experience, and much, much more from the FundAlarm and MFO contributors (that would be you guys). We have been very fortunate, and done quite well overall. But there is no getting around the fact that one decent adviser, putting us into American funds, started us down that long investment road. Stodgy but safe. That original 4.5% load was well worth it for us.
Would I recommend American Funds for someone just starting out today? No.. no need to pay that load. I would instead suggest either Vanguard or Fidelity, and lots of questions here on MFO.
Reply to @Old_Joe: Well said, OJ. Those guys earned their gravy in alota ways. Consider when we started out - no FA or MFO, no M*, no PCs or Internet, no cnbc or Bloomberg, no cable as we know it today. Rukeyser's fine series was in its infancy. Not the wide array of fund houses & no-loads we enjoy today. Doing any complex math was slow & tedious until hand held calcs became available to consumers in mid 70's.
Reply to @Old_Joe: Great context, OJ. It's easy to forget how rare really good, easily available investment information was, of the kind this board gets into daily, only say 15-20 years ago.
Comments
Perhaps there is more to this story beyond: "Vanguard Group, now the largest U.S. fund company, has seen its fortunes soar as investors and advisers gravitate toward its signature offerings—index funds, including in the form of exchange-traded funds. But American Funds' star has dimmed as those same buyers shy away from its core stock products."
Vanguard has historically been investor friendly. I suspect the number of no load offerings at Vanguard is higher than American. American aggressively hawks its funds to class room teachers and other well intended but unsuspecting working class folks, unaware that 5.75% load comes off the top of every dollar they deposit...and of better no load alternatives.
http://latimesblogs.latimes.com/money_co/2008/04/the-giant-ameri.html
A lot of the AUM drop is simply a reflection of investor fear of stocks.
Old news.
"(July 01, 2011) SEC Sides with American Funds Against Finra. It took six years, but, thanks to the SEC, Capital Group just defeated a $5-million attack from the NASD, now called Finra. Last Friday the commission overturned [the] Finra finding."
http://www.mfwire.com/article.asp?storyID=37219&template=article&bhcp=1
Includes links to the ruling, and to M*'s take on it.
I tend to view Vanguard and American Funds as more similar than different. As Desota notes, they are each the low cost leader on their respective sides of the load/noload fence. They both tend to be rather stodgy families that are slow in introducing products (where's that international bond fund?) slow to work with evolving sales channels (Vanguard playing catch up with ETFs, slow to adopt online trading), etc.
American Funds American Mutual A AMRMX, for example, rates Gold for all five of Morningstar's pillars. Here is Parent Pillar assessment:
No reference of the censure described in the LA Time article: "An appeals panel of the Financial Industry Regulatory Authority, the self-policing agency of the securities business, upheld the group’s three-year-old case alleging that the sales arm of L.A.-based American Funds broke industry rules in rewarding brokerages that sold its funds to investors."And under stewardship, Morningstar gives an "A" overall, but remains "Neutral" on regulatory part:
Thanks again perpetual_Bull for shedding light on this topic.
My negative experience with American's sales tactics of their loaded funds to young professionals is first-hand. I do not view them anywhere near as investor friendly as Vanguard.
One may suppose they (Am.Fds) should have no ER's, after the loads have been placed. Pretty hefty amount of money (load) to remove, especially from, a young investors pocket.
Reminds me of the wayback days when Merrill, E.F. Hutton and related had the big load mutual funds. Vanguard and Fidelity helped blow them out of the water for such charges.
Am. Funds, share classes/loads
Expense Ratio at left edge of fund window
The ER's (Am.Fds.) are similar to Fidelity, whose funds are without the front/back load, of course.
Regards,
Catch
I'm sure you know that loads get paid (mostly) to the sales people, who are not American Funds employees. They're the people you're referring to at Merrill, etc. But since you mentioned it ...
Back in the days when Merrill, etc. had big load funds, Fidelity also charged loads, though they called them "low" loads. As I recall, it was 2% front, plus 1% back (not contingent deferred) on FGRIX (and their growth and income funds in general), and 3% front end on FCNTX (and their growth funds in general, excepting dogs like Trend). And 100% of these loads went into Fidelity's pocket.
It was only in the early 90s(?) that Fidelity started waiving loads for IRAs, and the mid 90s(?) when they dropped their low loads altogether. And let's not forget the big load Fidelity Advisor funds.
Regarding expense ratios, I've tried to pair up American Funds (A class) with corresponding Fidelity funds (using M* categories and screener). What I see is that for the vanilla categories (Large Growth, Blend, Value), American Funds are noticeably cheaper. For bond funds (except junk), Fidelity wins, because it instituted a policy of 0.45% ER on most of its bond funds. Fidelity also wins on most balanced fund categories. American wins on World Alloc, World Stock.
Aggressive Alloc: Am Funds G&I Port 0.87%, Fid Asset Mgr 85% 0.80% - Fidelity wins
Conserv Alloc: Am Funds Inc Port 0.87%, Fid Asset Mgr 20%-40%, 0.54%-0.63% - Fidelity
Emerg Mkts: Am Funds New World 1.02%, Fid Emerg Mkts: 1.01% - tie
For Large Bl: Am Funds Euro Pac & Intl G&I 0.84%-0.88%; Fid Div Intl, Overseas 0.87% - 0.92% - tie
High Yield: Am Funds Hi Inc 0.67%, Fid Hi Income 0.76% - American
Interm Gov: Am Funds US Gov 0.61%; Fidelity (all) - 0.45% - Fidelity
Interm Term: Am Funds Bond Fund America 0.60%; Fidelity (all) 0.45% - Fidelity
Large Bl: Am Funds Fundamental Inv, Inv Co America 0.61%-0.63%; Fidelity (excluding index, quant) are higher - American
Large Gr: Am Funds Growth Fund Amer 0.68%; Fidelity (excluding index, quant, Magellan) are higher - American
Large Val: Am Funds Amer Mutual, Wash Mutual 0.62%; Fidelity (excluding index, quant) are higher - American
Moderate Alloc: Am Funds Am Balanced 0.62%, Fid Bal/Puritan 0.60% (but Asset Mgr funds 0.69%-0.76%) - American
Muni Calif: Am Funds Tax-Ex CA 0.64%; Fid Cal Muni 0.46% - Fidelity
Muni Nat Interm: Am Funds Ltd-Term Tax-Ex 0.60%, Fidelity Interm Muni 0.40% - Fidelity
Muni Nat Short: Am Funds Sht-Term Tax-Ex 0.60%, Fid Short-Interm 0.48% - Fidelity
Muni NY Long: Am Fund Tax Ex Fund NY 0.67%, Fid NY Muni Inc 0.47% - Fidelity
Muni Single State Long: Am Funds Tax Ex MD/VA 0.65% - 0.67%, Fidelity 0.48% - 0.55%
- Fidelity
Short Term Bond: Am Funds Interm Bond/ST Bnd Fund Amer 0.60%-0.63%; Fid Short Term Bond 0.45% - Fidelity
World Alloc: Am Funds Cap Inc 0.61%, Global Bal 1.08%; Fidelity Global Bal/Glob Strat 1.04% - American
World Stock: Am Fund Cap World/New Perspective 0.77%-0.79%; Fid WorldWide - 1.05%
(I ignored target date funds, as the ER listed appeared to be just for the wrapper fund of funds, and not the total ER.)
All generalizations are false, including this one.
Would you pay 5% of an asset to be assured that you'd never pay taxes on the income it generated? Sure you would, if you expected that asset to generate more than, say 20% in income over its lifetime (figuring a 25% tax bracket; 25% * 20% = 5% savings in taxes).
So if your company had a Roth 401K plan that used load funds (no waiver), I dare say you'd use it (or take the deduction now, if you felt you'd come out even better).
If you were seeking, and found, an honest advisor who gave you the choice of paying 5% up front or 1%/year for as long as you worked with the advisor, which would you pick? Maybe I'm being a little generous here, assuming that there are honest advisors who work on commission
Just as the SEC warns that a recurring 12b-1 fee can cost you more over time than a front end load, so can a recurring AUM fee over time cost you more than a front end load.
I'm not disagreeing that given the choice between a load fund and a no load fund, all else being equal (e.g. that you have both available, that selecting one over the other won't affect other fees you're paying, that the funds are otherwise comparable), pick the no load every time. It's just that sometimes you don't have that alternative - as with the 401K example, or when you're going to pay for advice one way or another.
SAMPLE: "I only know from my own personal experience, and I personally feel that there's a cyclical nature to things, so you don't want to start making generalizations about how bad things have become in comparison to the old days."
We had long had a money-market fund, Capital Preservation, with the Benham group. The Benham funds were sold to American Century at some point, and we watched closely and found that the new company did continue to run this fund without significant change, as promised. This led us to explore other American Century funds, and we found some funds similar to those of American Funds, also with low ERs, but with no load. Using the American Funds experience as a template, we gradually extended our investments with American Century, continually comparing the relative performance. For the most part, we used American Funds for IRAs, and AC for non-IRA.
Then we discovered FundAlarm, with it's great ability to compare equity fund performance, both against other funds and against a benchmark. We did this about once a month, and gradually became confident enough to move into and out of different funds based upon their performance.
We have learned many things from experience, and much, much more from the FundAlarm and MFO contributors (that would be you guys). We have been very fortunate, and done quite well overall. But there is no getting around the fact that one decent adviser, putting us into American funds, started us down that long investment road. Stodgy but safe. That original 4.5% load was well worth it for us.
Would I recommend American Funds for someone just starting out today? No.. no need to pay that load. I would instead suggest either Vanguard or Fidelity, and lots of questions here on MFO.