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Say what you will about the efficiency of the stock market, but when it comes to making money with various investment products, the market has been a pretty good arbiter of what is and isn't profitable. After all, if no one is buying your product, then chances are before long, no one will be selling it either. It now looks as if one more investment is fast on its way to becoming a relic.
Bye-bye, B shares
Only slightly less popular than the oil spill in the Gulf right now are the Class B fund shares that some mutual fund companies sell. Unlike their load-bearing A-share counterparts, B shares typically have no upfront loads but feature a deferred load when the investor goes to sell. This fee usually declines over time, so the longer you hold the fund, the less it costs you when you sell. As a trade-off, though, B shares usually charge much higher annual fees than corresponding A shares do.
Fortunately for investors, B shares are proving to be unprofitable for fund companies and are slowly being phased out. Fidelity Investments recently announced that it would end sales of its Class B shares this fall, joining the ranks of American Funds, Pimco, and Franklin Templeton, among others, that have thrown their B shares on the scrap heap. This is good news for investors who might have purchased these funds and ended up paying excessive annual fees as well as potentially facing a sales charge when they go to sell their shares.
Load-ing up on funds
Although I'm glad to see B shares go silently into the night, it brings up another sore spot with me -- the whole idea of having investors pay any kind of loads in the first place. I concede that brokers and advisors need some form of compensation for their advice, but I don't like the idea that the fund company pays them for putting clients into their funds. Furthermore, I don't think there is ever a situation in which I could justify seeing an investor pay a front-end or back-end load to own a mutual fund. In almost every case, there is another fund option available that will do just as good a job for a lower price, without a load.
For anyone engaging the services of a broker or advisor, exercise caution if said professional is directing you toward mutual funds that charge loads. Think twice about committing your capital in such a case. You would probably be better off with other, load-free investments. There's no need to handicap yourself financially at the starting line of the long-term investment race.
The hard part is that there are a number of first-rate mutual funds that most investors can buy only by paying some sort of load or 12b-1 fee -- for example, Bill Gross' Pimco Total Return (PTTAX), which comes with a 3.75% front-end charge. Fortunately, there is one place where investors can typically get access to great funds like these without paying the load: within a qualified retirement plan, such as a 401(k). So be sure to use this avenue to purchase top-tier load-bearing funds. Just verify with your plan administrator before buying that you can, in fact, bypass the load fee within your plan.
A few good funds
One of the biggest and best-known fund shops that exclusively offers load-bearing funds is American Funds. If you have load-free access to this fund family within your plan, make sure you grab at least one of the shop's offerings. Two of my favorites are superstars American Funds Growth Fund of America (AGTHX) and American Funds Europacific Growth (AEPGX).
One more good option in this lineup is American Funds Fundamental Investors (ANCFX), a large-blend fund that ranks in the top 5% of its peer group over the past decade and a half. Right now, industrial names Lockheed Martin (NYSE: LMT ) and Boeing (NYSE: BA ) help make up the fund's largest overweight sector in relation to the S&P 500, at almost 20% of the fund's assets. Management believes that companies such as these should benefit as the economy recovers but are also healthy enough to weather any further economic challenges. Dividend payers also receive a lot of attention in the portfolio, including names such as Merck (NYSE: MRK ) and McDonald's (NYSE: MCD ) , which sport current yields of 4.3% and 3.2%, respectively. The team believes that the ability to pay dividends is a sign that a company has real earnings and is an indicator of strength and health, as well as a motivator for management to be good stewards of capital.
Another good load fund commonly available within retirement plans is Victory Diversified Stock (SRVEX). This longtime winner has recently been shifting toward relatively cheap higher-quality companies that should hold up well in tough times. Top fund holdings include ExxonMobil (NYSE: XOM ) , Pfizer (NYSE: PFE ) , and Johnson & Johnson (NYSE: JNJ ) , all of which boast hefty dividend yields and P/E ratios meaningfully lower than that of the market. Management is betting that plays like these should come back into favor in the next phase of the market cycle and edge out the broader market. Over time, Victory Diversified Stock has delivered the goods, posting an 8.5% annualized gain, ahead of 93% of its competition.
Ultimately, it's a good thing for investors that Class B shares are falling by the wayside. I can only hope that more and more load-bearing share classes also fall from popularity in the coming years. In the meantime, invest in the best load funds strategically, including buying within their qualified retirement plans, if available, to avoid paying the loads.
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