Mutual Fund Share Classes

A mutual fund is an actively managed investment fund with day-to-day managers who buy and sell securities according to a plan which designates a specific purpose, style or category.  Current estimates place total net assets in domestic mutual funds at approximately $27.0 trillion, which total accounts for more than 40% of the global mutual fund market.   At present, there are about 8,500 mutual funds in the US with about 60% focusing on equities, 20% are bond funds, 15% are money market funds and 5% are hybrid or alternative. Many mutual funds offer different types, or classes, of shares all of which invest in the same investment portfolio and will have the same investment objectives and policies. Securities and Exchange Commission guidance on this topic states “that each class will have different shareholder services and/or distribution agreements with different fees and expenses and, therefore, different performance results. A multi-class structure offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals (including the time that they expect to remain invested in the fund).”  The timing and amount of mutual fund fees must be considered as you design and execute your investment plan. The choice then for investors boils down to two things: how much you pay in fees and when you pay those fees, both decisions which can have a significant impact on the long-term investment return of your portfolio.

The costs of investing in a mutual fund are typically related to the sale and operation of the fund. A fund may charge a sale or redemption charge, often referred to as a load, on transactions in fund shares. Mutual funds sold without a sales charge are called no-load funds. Operating expenses, known as the 12b-1 fee, are deducted daily from fund assets and are used to cover distribution and shareholder service expenses.  Choosing the share class most suitable for you depends on your investing time horizon, the amount you will invest, whether you qualify for any discounts and whether the investment will be made in a brokerage or advisory account. Common share classes are A (front-end load), B (deferred fee or surrender charge), C (no sales charge and higher annual 12b-1 fee), R (Retirement) and I (Institutional). In the case of Class A shares, the full price paid by the investor is reduced (by the sales load) and thus not entirely invested in fund shares. Discounts are often available at different purchase thresholds or breakpoints or if you, along with qualifying family members, hold mutual funds in the same fund family. Class A shares are generally suitable for large amounts invested for the long term, particularly if discounts can lower the upfront sales load.  Class B shares (with a surrender charge and their higher 12b-1 fees) may be more suitable for investing small amounts over a long-term horizon.  Class C shares, with a level load charge instead of a front-end sales charge and high 12b-1 fees, may nonetheless prove to be less expensive than Class A or B shares if you have a short investment timeline and a small amount to invest. Class R shares (aptly known as retirement shares) are available only through employer-sponsored retirement plans and carry no load fees and typically have low 12b-1 fees in a range of 0.25% to 0.50%. R shares are well suited to retirement savers interested in long-term value investing with an eye to fee efficiency and transparency.

Over 14 years, we as a firm have been very selective when it comes to choosing mutual funds for our client portfolios. One of our long-term promises to our clients has been (and will continue to be) to purchase only mutual funds (typically Class I) that are designated as no load or load-waived and have low 12b-1 operating expenses.  This basic value proposition will always be part of what guides us in serving our clients.