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.
Not a single mention of American's prolific use of front load. An indefensible practice today.
Or their excessively use of share classes per fund, another unfriendly practice for shareholders.
This company hawks their loaded funds to unsuspecting young professionals (via top down offerings to teachers unions, etc.) and then takes 6% of every deposit right off the top...in the fine print. Plus annual fees.
Charles, your anti-AF stance is well known. If you don't want to invest there that is of course your business, but no need to repeat your position every time AF is mentioned in a link. M* has given the company their highest rating and their ERs are second lowest in the industry after VG.
@Desota: I've never been a fan of team managed and loaded-fund either, but unlike Charles, I give credit where credit is due. They have a number of excellent funds. Regards, Ted
Charles, at this point in time I agree with you. However, if it hadn't been for American Funds getting us started thirty years ago we wouldn't have enough at this point to even justify reading MFO.
Well, I've got a number of American Funds within my portfolio. They have done a pretty good for me over the years and I feel I am better off with them than I would have been without them. I feel much in the same as O_J.
And someone needs to help counterbalance M*'s blind coverage in the case of AF.
On the ER stat. If you ignore load, yes ER is good with AF. But you shouldn't...and neither should M*.
Thanks OJ. Understand. In years long past, most funds had awful loads and folks did not have much choice. Not true anymore, fortunately.
Blind coverage? Ignoring load? What's M*'s most prominent aspect of fund coverage? (Rhetorical question.) I would say its star ratings. Not most useful, but most prominent.
M* adjusts for loads in its star ratings. This is why .lw (load waived) shares often get higher star ratings (and why I specifically suggested to Schwab that they show these latter ratings when displaying OneSource funds).
How does the total cost of ownership for the long term investor compare with American Funds vs. almost any other fund family (outside of Vanguard)? Given American Funds' low ERs, I would guess that it's lower than most. (We're not talking buy and hold here, just staying within the family - once a load is paid, it doesn't have to get paid again when one switches funds.)
I'd give more weight to your complaints about American Funds if you showed the same concern for families like PIMCO, which has more assets in A shares than D shares in funds like: GNMA ($334M vs. $121M), Investment Grade Corp ($1.1B vs. $0.5B), Unconstrained Bond ($1.5B vs. $1.3B) and of course, Total Return ($21B vs $15B).
In years past, people didn't have much choice? Though Vanguard started as a load family, it went noload in 1977. The No-Load Mutual Fund Association was formed in 1971. You had noload funds then from Scudder, from T. Rowe Price, Stein Rowe, even Lehman Bros.
By the mid 80s, as mutual fund sales took off, almost half those sales dollars (45%) went into noload funds. Sure, if one wants to go back to the days when CEFs made up a major part of the market, there weren't too many noload fund choices. But there's been a plethora of noload funds for decades.
The load model of compensation is awful and it would be nice to see an industry titan take a stance on that, but I think it's fair for M* to consider the funds both with and without load because many people do have access to it no-load. My wife had the R5 class shares in a previous 401k plan and her father has access to R6 shares. These are really cheap, for Growth Fund of America, the A shares have an ER of 0.77 vs 0.39 for R5 and 0.36 for R6. At these prices, the funds are quite attractive.
"there's been a plethora of noload funds for decades"
Certainly no argument on that observation. But let's take a look at the "ignorance factor". We have been saving as much as possible for retirement ever since we were married in 1970. We established IRAs as soon as possible, primarily using savings accounts for that purpose. (Remember them?)
I did attempt to venture into the equity market in a small way, with very mixed and generally poor results. As I've mentioned a few times before, in the late 70's with double-digit inflation roaring, I took a chance on some Munis paying 14/15%, figuring that if inflation couldn't be tamed that money would pretty quickly be worthless anyway. That turned out to be a great bet. For some years we took advantage of the San Francisco real-estate market with a lot of sweat-equity, and that too worked out well.
But mutual funds? Sure, we watched Lou Rukeyser along with lots of other folks, but that really didn't give us the depth of knowledge regarding funds to get our feet wet there. Along came an American Funds "adviser". Sure, they charged a load. Sure, he got his cut. But he sat with us for many an hour explaining the ways of the mutual fund world, and even though I really hated the load I regarded it as the price of entry and education.
American Funds has always treated us fairly. Unlike other load funds at that time, they did not charge any load on reinvested proceeds, and their ERs were (and still are) very reasonable. They allowed consolidation of the two IRAs and our trust fund to minimize the front load. After a few years we had accumulated enough to eliminate the load altogether. In 2008 the economic fiasco caused our American Funds total holdings to drop below the no-load threshold, but they still honored the no-load for us on additional investments.
Perhaps most importantly, our experiences with American have allowed us to have a sound basis for comparison as we have branched out into many other funds and fund types and companies. I don't for one minute regret our experiences with American Funds.
Old-Joe - great post, best I've seen in many a moon here. Thanks! And married to the same spouse since 1970? What a dinosaur and I mean that in the most complimentary of ways. You are one lucky guy.
Good post O_J, I feel much the same way as A/F's has done good by me too. In addition, I have been married to my wife for forty years, not quite as long as you to yours ... but, long enough to know that I think I'll keep on keeping on with both.
OJ - thanks for the memories. While there's a lot more information available now than back then, I'm not convinced that investing is any easier. For example, in the past few years, the thinking on designing 401K plans has shifted from "offer everything" to "offer a well chosen, limited set of options", because people become paralyzed with too many choices and not enough understanding.
When I first started working, my employer (one of the largest in the country at the time) offered just four options - guaranteed interest, diversified equity portfolio, government obligations, and company stock. I just took a glance at my old records - it seems like I started with a 50/50 split - company stock/diversified equity. But then the stock market took a dive, and for the next several years it seems I put everything new into the guaranteed interest option.
Not the most insightful move, but understandable. In hindsight, I probably would have benefited as you did from an adviser. Some people may benefit when they're starting out. Some people have an aversion to dealing with financial details, and for them it is worth paying someone for that service for many years. (Aversion is not the same as inability.)
Just curious - the original IRAs (enacted in 1974, allowing for contributions starting in 1975) only allowed contributions if one was not covered by a pension plan at work. It wasn't until 1982 that the max went up to $2K, and you were allowed to contribute even with a pension. So when exactly were you first able to contribute to your IRA?
Hi msf- Well, back then I wasn't covered by a pension, so it would have been in 75. Jeez, 2k was a LOT of money back then. Now that you mention it, after we were married we bought a brand-new 1970 Plymouth Valiant: cost, 2k!
We were also very fortunate that my wife, who was a SF public school teacher, was able to contribute to SS as well as the teacher's retirement fund. Not very many school districts offered that option; not a lot of SF teachers took it; now many wish that they had. Our American Funds adviser also set up a 403b for my wife, in addition to the retirement and SS. I guess that I'd better keep her.
Today, AF offers some 57 funds. ALL impose front load, 6% nominally.
Would you really recommend to your friends and family funds that take 6% of every deposit made to the fund? Plus annual expenses?
AF also imposes a 12b-1 fee of its funds for advertising.
You honestly want to support that?
As for M*...I believe that they need to at least acknowledge AF imposes front loads on ALL their funds (and if not they charge a higher ER). Which means you better be investing for a seriously long time to mitigate the drag imposed by the load.
Thank goodness front-load is included in star rating calcs. That is only fair. MFO also includes load in its risk/return ratings.
There are some extraordinary fund families today that are genuinely shareholder friendly. Please consider investing in those.
Yes, easy for me to focus on American Funds because of their size. And because I've had friends and family fall victim to their sales tactics. Signing up for automatic deposits for Class A shares first day on job. I can assure you they were not getting individual adviser attention.
That said, I try to wail on high ER, loads, 12b-1 fees and other share holder unfriendly practices every chance I get regardless of fund house.
Charles- I don't think that anyone here is recommending or even suggesting that someone starting out today should consider American, or any other fund that charges a front load. As you say, it's no longer 1970. With respect to M*, I surely don't get the feeling that anyone here at MFO is particularly fond of them, either. Personally I use M* only for the free service which they offer to determine my YTD and X-ray figures, and that's it.
To understand the shortcomings of a commercial operation but opt to use it to one's own advantage certainly does not imply "succumbing to AF/M* hype". I take your point that continuing to use American Funds could be perceived as "supporting" them. If, however, one is using that company without load, with low ERs, via excellent direct internet access, and they are competently administering two IRA Distributions, it would be working against one's own interests to throw the whole setup overboard just to try to make a point which they would fail to recognize in the first place.
I understand your feelings with respect to financial boycott- I feel the same way about Bank of America and Wells Fargo, with their sorry record of screwing everyone possible as often as possible. I just don't see American as being in that sort of company simply because I don't appreciate one particular aspect of their operation that doesn't affect me in any case.
I use a MAC, but don't particularly care for some of their attitude either. I detest MS, and refuse to use their product unless there is no other option. Life is a compromise, in all respects.
Charles's latest post is filled with inaccuracies. AF offers 33 funds, not counting funds of funds. The loads charged vary depending on the fund. Bond funds have a smaller load. The max load is 5.75. The loads are reduced or eliminated with larger investments. The 12b1 goes to the advisor, it does not go for ads. This is my last post on this subject.
@Desota. I double checked this morning and through June 2014, AF does indeed have 57 funds at least 1 year old. Oldest share class. All impose load, min 2.5%. The 5.75% load is on 32 of the 57 funds. All impose 12b-1, average 0.22%. Average ER after load: 0.74%.
American Funds sales loads vary based upon the fund and the amount you have invested with them. For starters the top commission paid for an equity product is 5.75% and is discounted down from there. The top commission paid for their fixed income product is 3.75% and is discounted down from there. And, should you own, or invest, a million with A/F then you buy everything at nav. In addition, after purchase, an investor can move around within their family of funds through net asset value exchange program commission free. I believe that commission discounts start to kick in at the $25,000 threshold. And, if you wanted to be clever and buy, say, the fixed income product ABNDX and then later do a nav exchange to an equity product, say, AGTHX then their entry commission would be the 3.75%, and not the 5.75%, would stand. This is not widely known so keep it to yourself.
Good points OJ. I'll try to focus on just calling more attention to the bad practices of loads, high ER, etc. But if I cross the line, please throw the flag.
I do think companies can change. It depends of course on the leadership at the time.
Now, if AF (and PIMCO and other giants) would stop the practice of front loads, that would be really great.
@mns and Old_Skeet. My issue with multiple share classes is that investors are paying different fees depending on their association of some kind. I believe AF is among the worst in industry here with an average of something like 12 share classes per unique fund.
Though I take advantage, sad to say, of lowest fee class I can find, I most respect the practice of single share class.
American Funds offers 59 funds (not 57). One of these funds never charges a load. It's a MMF, but MMFs in load families used to charge loads (e.g. I believe Fidelity Select MMF used to charge the same 3% load that Fidelity charged for its Select Funds).
As others pointed out, the min load on these A shares is 0%, since there are breakpoints. (Your "min" in the earlier post above referred rather to the lowest maximum load charged by any of these funds.)
"Nominal" roughly means stated as opposed to actual. For example, one's nominal tax bracket may be 25%, but the actual percentage paid on an incremental dollar may be more or less than a quarter, depending on phaseouts, credits, surtaxes, etc. Likewise, the actual front end load (as a percentage of amount going into the investment) for a 5.75% load fund is 1/(1-5.75%) = 6.1%. The "nominal" is 5.75% (or lower for bond funds, etc.)
M* uses not only front load, but all loads in their star ratings (other loads are assessed on a daily basis as part of the ER - though I wonder if M* correctly adjusts 10 year ratings for share classes that convert after 8 years).
Investors pay for advertising, regardless of whether the expense is broken out as a separate line item (12b-1). Where do people think the money comes to pay for all those Vanguard ads I keep seeing? Or as Vanguard itself writes: "In the words of one client - 'Why spend some of my money to attract some other investor?'"
So I regard 12b-1 fees as just a distraction. Though in contrast, when's the last time you saw a D&C ad?
Speaking of Vanguard, investors there pay different fees and commissions depending on their association of some kind. If they have enough invested in a Vanguard fund, their ER drops (Admiral share conversion). If they use VBS, they can buy ETFs without paying the broker. And if they have a lot invested with the family (like OJ and American), they can get into closed Vanguard funds and buy non-Vanguard TF funds without a commission. I for one am not complaining about their fees, even if I don't get all the perks there.
Thank you for taking note of PIMCO's loads. Below is a bit more on this that I'd drafted prior to your latest responses. The data and observations are, I think, still relevant.
American Funds' oldest share classes do carry loads; they've since been adding share classes without loads. In contrast, PIMCO's original funds from 1987, PTLDX, PTTRX, and PTSHX all added load shares (PTLAX, PTTAX, PSHAX, respectively) in January 1997.
While PIMCO's original share classes don't have 12b-1 fees, the new ones do. (Not a concern of mine, as I explained above, but it is nevertheless a nominal fee)
Which family is moving in the right direction? There are indeed dinosaurs, but they may come from different "prehistoric" (last century) eras. Several fund families in the 90s tried to grow their market share by adding load classes and using salesman (um, "advisers") to gather assets. American Century, for example. Some families like AC moved on, returning to the NTF marketplace without adding 12b-1 fees as PIMCO did. Other families seem to be stuck in the tarpit of the 90s.
Quick addendum - it looks like Merrill Edge may provide NTF access to F-1 shares. At least they list this class in their fund searcher (while they don't list classes they clearly don't sell, like F-2).
Has anyone checked this out? As part of that 90s trend (using brokers more extensively to gather assets), American Funds made class F shares available through some discount brokers (Citicorp Investment Services and WellsTrade come to mind, but I'd have to check). Those options (and Class F shares) are gone, but perhaps there is still some back door like Merrill?
"But in terms of recommending American Funds today, I do side with Charles."
Hi Maurice- yes, I also completely agree with that. There's no excuse for a load fund in today's environment. Also, if one happens to be in American Funds, you'd better keep an eye on things- among those 57 or 59 funds they have some real dogs, some pretty decent ones, and many just so-so.
Comments
Not a single mention of American's prolific use of front load. An indefensible practice today.
Or their excessively use of share classes per fund, another unfriendly practice for shareholders.
This company hawks their loaded funds to unsuspecting young professionals (via top down offerings to teachers unions, etc.) and then takes 6% of every deposit right off the top...in the fine print. Plus annual fees.
And M* continues to look the other way.
that is of course your business, but no need to repeat your position every
time AF is mentioned in a link. M* has given the company their highest rating
and their ERs are second lowest in the industry after VG.
Regards,
Ted
Regards- OJ
Agreed that I sound like a broken record on this one, but IMHO...it's an important story to tell and keep telling.
Like the Edward Jones tragedy.
And someone needs to help counterbalance M*'s blind coverage in the case of AF.
On the ER stat. If you ignore load, yes ER is good with AF. But you shouldn't...and neither should M*.
Thanks OJ. Understand. In years long past, most funds had awful loads and folks did not have much choice. Not true anymore, fortunately.
c
M* adjusts for loads in its star ratings. This is why .lw (load waived) shares often get higher star ratings (and why I specifically suggested to Schwab that they show these latter ratings when displaying OneSource funds).
How does the total cost of ownership for the long term investor compare with American Funds vs. almost any other fund family (outside of Vanguard)? Given American Funds' low ERs, I would guess that it's lower than most. (We're not talking buy and hold here, just staying within the family - once a load is paid, it doesn't have to get paid again when one switches funds.)
I'd give more weight to your complaints about American Funds if you showed the same concern for families like PIMCO, which has more assets in A shares than D shares in funds like: GNMA ($334M vs. $121M), Investment Grade Corp ($1.1B vs. $0.5B), Unconstrained Bond ($1.5B vs. $1.3B) and of course, Total Return ($21B vs $15B).
In years past, people didn't have much choice? Though Vanguard started as a load family, it went noload in 1977. The No-Load Mutual Fund Association was formed in 1971. You had noload funds then from Scudder, from T. Rowe Price, Stein Rowe, even Lehman Bros.
By the mid 80s, as mutual fund sales took off, almost half those sales dollars (45%) went into noload funds. Sure, if one wants to go back to the days when CEFs made up a major part of the market, there weren't too many noload fund choices. But there's been a plethora of noload funds for decades.
Certainly no argument on that observation. But let's take a look at the "ignorance factor". We have been saving as much as possible for retirement ever since we were married in 1970. We established IRAs as soon as possible, primarily using savings accounts for that purpose. (Remember them?)
I did attempt to venture into the equity market in a small way, with very mixed and generally poor results. As I've mentioned a few times before, in the late 70's with double-digit inflation roaring, I took a chance on some Munis paying 14/15%, figuring that if inflation couldn't be tamed that money would pretty quickly be worthless anyway. That turned out to be a great bet. For some years we took advantage of the San Francisco real-estate market with a lot of sweat-equity, and that too worked out well.
But mutual funds? Sure, we watched Lou Rukeyser along with lots of other folks, but that really didn't give us the depth of knowledge regarding funds to get our feet wet there. Along came an American Funds "adviser". Sure, they charged a load. Sure, he got his cut. But he sat with us for many an hour explaining the ways of the mutual fund world, and even though I really hated the load I regarded it as the price of entry and education.
American Funds has always treated us fairly. Unlike other load funds at that time, they did not charge any load on reinvested proceeds, and their ERs were (and still are) very reasonable. They allowed consolidation of the two IRAs and our trust fund to minimize the front load. After a few years we had accumulated enough to eliminate the load altogether. In 2008 the economic fiasco caused our American Funds total holdings to drop below the no-load threshold, but they still honored the no-load for us on additional investments.
Perhaps most importantly, our experiences with American have allowed us to have a sound basis for comparison as we have branched out into many other funds and fund types and companies. I don't for one minute regret our experiences with American Funds.
When I first started working, my employer (one of the largest in the country at the time) offered just four options - guaranteed interest, diversified equity portfolio, government obligations, and company stock. I just took a glance at my old records - it seems like I started with a 50/50 split - company stock/diversified equity. But then the stock market took a dive, and for the next several years it seems I put everything new into the guaranteed interest option.
Not the most insightful move, but understandable. In hindsight, I probably would have benefited as you did from an adviser. Some people may benefit when they're starting out. Some people have an aversion to dealing with financial details, and for them it is worth paying someone for that service for many years. (Aversion is not the same as inability.)
Just curious - the original IRAs (enacted in 1974, allowing for contributions starting in 1975) only allowed contributions if one was not covered by a pension plan at work. It wasn't until 1982 that the max went up to $2K, and you were allowed to contribute even with a pension. So when exactly were you first able to contribute to your IRA?
We were also very fortunate that my wife, who was a SF public school teacher, was able to contribute to SS as well as the teacher's retirement fund. Not very many school districts offered that option; not a lot of SF teachers took it; now many wish that they had. Our American Funds adviser also set up a 403b for my wife, in addition to the retirement and SS. I guess that I'd better keep her.
I offer a counterpoint.
To American Funds and Morningstar fans.
It's no longer 1970.
Today, AF offers some 57 funds. ALL impose front load, 6% nominally.
Would you really recommend to your friends and family funds that take 6% of every deposit made to the fund? Plus annual expenses?
AF also imposes a 12b-1 fee of its funds for advertising.
You honestly want to support that?
As for M*...I believe that they need to at least acknowledge AF imposes front loads on ALL their funds (and if not they charge a higher ER). Which means you better be investing for a seriously long time to mitigate the drag imposed by the load.
Thank goodness front-load is included in star rating calcs. That is only fair. MFO also includes load in its risk/return ratings.
There are some extraordinary fund families today that are genuinely shareholder friendly. Please consider investing in those.
Yes, easy for me to focus on American Funds because of their size. And because I've had friends and family fall victim to their sales tactics. Signing up for automatic deposits for Class A shares first day on job. I can assure you they were not getting individual adviser attention.
That said, I try to wail on high ER, loads, 12b-1 fees and other share holder unfriendly practices every chance I get regardless of fund house.
To understand the shortcomings of a commercial operation but opt to use it to one's own advantage certainly does not imply "succumbing to AF/M* hype". I take your point that continuing to use American Funds could be perceived as "supporting" them. If, however, one is using that company without load, with low ERs, via excellent direct internet access, and they are competently administering two IRA Distributions, it would be working against one's own interests to throw the whole setup overboard just to try to make a point which they would fail to recognize in the first place.
I understand your feelings with respect to financial boycott- I feel the same way about Bank of America and Wells Fargo, with their sorry record of screwing everyone possible as often as possible. I just don't see American as being in that sort of company simply because I don't appreciate one particular aspect of their operation that doesn't affect me in any case.
I use a MAC, but don't particularly care for some of their attitude either. I detest MS, and refuse to use their product unless there is no other option. Life is a compromise, in all respects.
Regards- OJ
American Funds sales loads vary based upon the fund and the amount you have invested with them. For starters the top commission paid for an equity product is 5.75% and is discounted down from there. The top commission paid for their fixed income product is 3.75% and is discounted down from there. And, should you own, or invest, a million with A/F then you buy everything at nav. In addition, after purchase, an investor can move around within their family of funds through net asset value exchange program commission free. I believe that commission discounts start to kick in at the $25,000 threshold. And, if you wanted to be clever and buy, say, the fixed income product ABNDX and then later do a nav exchange to an equity product, say, AGTHX then their entry commission would be the 3.75%, and not the 5.75%, would stand. This is not widely known so keep it to yourself.
Old_Skeet
I do think companies can change. It depends of course on the leadership at the time.
Now, if AF (and PIMCO and other giants) would stop the practice of front loads, that would be really great.
Though I take advantage, sad to say, of lowest fee class I can find, I most respect the practice of single share class.
As others pointed out, the min load on these A shares is 0%, since there are breakpoints. (Your "min" in the earlier post above referred rather to the lowest maximum load charged by any of these funds.)
"Nominal" roughly means stated as opposed to actual. For example, one's nominal tax bracket may be 25%, but the actual percentage paid on an incremental dollar may be more or less than a quarter, depending on phaseouts, credits, surtaxes, etc. Likewise, the actual front end load (as a percentage of amount going into the investment) for a 5.75% load fund is 1/(1-5.75%) = 6.1%. The "nominal" is 5.75% (or lower for bond funds, etc.)
M* uses not only front load, but all loads in their star ratings (other loads are assessed on a daily basis as part of the ER - though I wonder if M* correctly adjusts 10 year ratings for share classes that convert after 8 years).
Investors pay for advertising, regardless of whether the expense is broken out as a separate line item (12b-1). Where do people think the money comes to pay for all those Vanguard ads I keep seeing? Or as Vanguard itself writes: "In the words of one client - 'Why spend some of my money to attract some other investor?'"
So I regard 12b-1 fees as just a distraction. Though in contrast, when's the last time you saw a D&C ad?
Speaking of Vanguard, investors there pay different fees and commissions depending on their association of some kind. If they have enough invested in a Vanguard fund, their ER drops (Admiral share conversion). If they use VBS, they can buy ETFs without paying the broker. And if they have a lot invested with the family (like OJ and American), they can get into closed Vanguard funds and buy non-Vanguard TF funds without a commission. I for one am not complaining about their fees, even if I don't get all the perks there.
Thank you for taking note of PIMCO's loads. Below is a bit more on this that I'd drafted prior to your latest responses. The data and observations are, I think, still relevant.
American Funds' oldest share classes do carry loads; they've since been adding share classes without loads. In contrast, PIMCO's original funds from 1987, PTLDX, PTTRX, and PTSHX all added load shares (PTLAX, PTTAX, PSHAX, respectively) in January 1997.
While PIMCO's original share classes don't have 12b-1 fees, the new ones do. (Not a concern of mine, as I explained above, but it is nevertheless a nominal fee
Which family is moving in the right direction? There are indeed dinosaurs, but they may come from different "prehistoric" (last century) eras. Several fund families in the 90s tried to grow their market share by adding load classes and using salesman (um, "advisers") to gather assets. American Century, for example. Some families like AC moved on, returning to the NTF marketplace without adding 12b-1 fees as PIMCO did. Other families seem to be stuck in the tarpit of the 90s.
Has anyone checked this out? As part of that 90s trend (using brokers more extensively to gather assets), American Funds made class F shares available through some discount brokers (Citicorp Investment Services and WellsTrade come to mind, but I'd have to check). Those options (and Class F shares) are gone, but perhaps there is still some back door like Merrill?
If all investors were as knowledgeable as you, this industry would be a better place.
c
Hi Maurice- yes, I also completely agree with that. There's no excuse for a load fund in today's environment. Also, if one happens to be in American Funds, you'd better keep an eye on things- among those 57 or 59 funds they have some real dogs, some pretty decent ones, and many just so-so.
OJ