Are funds with a load really that bad?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
BV3273
Posts: 716
Joined: Mon Oct 19, 2015 7:20 pm

Are funds with a load really that bad?

Post by BV3273 »

Hear me out.

I was doing some research on Fidelity on some new mutual funds for my taxable account. I came across two funds with no loads and relatively low ERs. I then found 2 funds with 5.25% loads and decent ERs. The returns on the funds with loads were significantly higher than most of the funds I currently own.

I know this isn’t very Boglehead-like to say, but if I was making a higher rate of return than my index funds (5-10% higher after load) then why not use them?

Looking forward to feedback.

-BV
livesoft
Posts: 73523
Joined: Thu Mar 01, 2007 8:00 pm

Re: Are funds with a load really that bad?

Post by livesoft »

If you have two funds invested in exactly the same things, but one has a load and one doesn't, then which one should be better for you?

If you have two funds invested in completely different things, but one has a load and one doesn't, then shouldn't you be comparing two funds that invest in exactly the same things?
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
prudent
Moderator
Posts: 7701
Joined: Fri May 20, 2011 2:50 pm

Re: Are funds with a load really that bad?

Post by prudent »

When you say the load funds did 5%-10% better than index funds, over what period of time was that?
User avatar
willthrill81
Posts: 21525
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Are funds with a load really that bad?

Post by willthrill81 »

BV3273 wrote: Fri Jul 19, 2019 6:20 pm Hear me out.

I was doing some research on Fidelity on some new mutual funds for my taxable account. I came across two funds with no loads and relatively low ERs. I then found 2 funds with 5.25% loads and decent ERs. The returns on the funds with loads were significantly higher than most of the funds I currently own.

I know this isn’t very Boglehead-like to say, but if I was making a higher rate of return than my index funds (5-10% higher after load) then why not use them?
If you could be reasonably confident that you would earn a significantly higher return with the load funds than the index funds, then buying the load funds would make sense.

However, there is a lot of data on this, and past performance of funds is not a reliable indicator of future performance. The load funds are very unlikely to continue their outperformance. What is most likely to happen is that the funds will underperform the market going forward in addition to walloping you with the 5.25 load and a high expense ratio.

So yes, funds with a load really are that bad.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
mcraepat9
Posts: 1619
Joined: Thu Jul 16, 2015 11:46 am

Re: Are funds with a load really that bad?

Post by mcraepat9 »

BV3273 wrote: Fri Jul 19, 2019 6:20 pm Hear me out.

I was doing some research on Fidelity on some new mutual funds for my taxable account. I came across two funds with no loads and relatively low ERs. I then found 2 funds with 5.25% loads and decent ERs. The returns on the funds with loads were significantly higher than most of the funds I currently own.

I know this isn’t very Boglehead-like to say, but if I was making a higher rate of return than my index funds (5-10% higher after load) then why not use them?

Looking forward to feedback.

-BV
I would be surprised if the "returns" on the funds with loads actually included the loads when factoring returns. That's an old trick - include the load and then see how returns look. That is, if you are comparing a $10k investment, be sure you are starting the loaded fund at $9475 and your fund without a load at $10k.
Amateur investors are not cool-headed logicians.
dbr
Posts: 33863
Joined: Sun Mar 04, 2007 9:50 am

Re: Are funds with a load really that bad?

Post by dbr »

Funds with a load and otherwise having the same expense ratio are not bad if the holding is for long enough to amortize the load, say 5% over fifty years which reduces the cost to .1% not compounded (meaning the gains in the investment don't incur a 5% load). Note a load over a long time is not as pernicious as an annual ER or an AUM. Unfortunately it is not likely the loaded fund has low ERs, low turnover, tax efficiency and is not prone to manager risk.

The possibility the fund has more return than some other fund is not possible if it is invested in the same things and is irrelevant if it is not invested in the same things. The idea that you can pay the managers to pick what to invest in at similar risk and more return after costs does not compute.
delamer
Posts: 10590
Joined: Tue Feb 08, 2011 6:13 pm

Re: Are funds with a load really that bad?

Post by delamer »

mcraepat9 wrote: Fri Jul 19, 2019 6:32 pm
BV3273 wrote: Fri Jul 19, 2019 6:20 pm Hear me out.

I was doing some research on Fidelity on some new mutual funds for my taxable account. I came across two funds with no loads and relatively low ERs. I then found 2 funds with 5.25% loads and decent ERs. The returns on the funds with loads were significantly higher than most of the funds I currently own.

I know this isn’t very Boglehead-like to say, but if I was making a higher rate of return than my index funds (5-10% higher after load) then why not use them?

Looking forward to feedback.

-BV
I would be surprised if the "returns" on the funds with loads actually included the loads when factoring returns. That's an old trick - include the load and then see how returns look.
Exactly.

And if you aren’t comparing funds with the same investment objectives, then your comparison doesn’t hold up.
Jags4186
Posts: 5233
Joined: Wed Jun 18, 2014 7:12 pm

Re: Are funds with a load really that bad?

Post by Jags4186 »

OP, don’t be shy. Please post the funds you are looking at.

There are plenty of active funds that have outperformed their benchmark index funds, even with loads. The problem is that there are way more than have underperformed their benchmark index. And many times active funds have for a time outperformed their benchmarks only to have their performance come back down to earth or significantly underperform after some time. You can invest with loaded actively managed funds, but the odds of beating the index going forward are not good.
Topic Author
BV3273
Posts: 716
Joined: Mon Oct 19, 2015 7:20 pm

Re: Are funds with a load really that bad?

Post by BV3273 »

Jags4186 wrote: Fri Jul 19, 2019 6:36 pm OP, don’t be shy. Please post the funds you are looking at.

There are plenty of active funds that have outperformed their benchmark index funds, even with loads. The problem is that there are way more than have underperformed their benchmark index. And many times active funds have for a time outperformed their benchmarks only to have their performance come back down to earth or significantly underperform after some time. You can invest with loaded actively managed funds, but the odds of beating the index going forward are not good.
Will do. Here they are:

AOFAX
BMGAX
User avatar
Watty
Posts: 20950
Joined: Wed Oct 10, 2007 3:55 pm

Re: Are funds with a load really that bad?

Post by Watty »

BV3273 wrote: Fri Jul 19, 2019 6:20 pm I know this isn’t very Boglehead-like to say, but if I was making a higher rate of return than my index funds (5-10% higher after load) then why not use them?
In addition to the ways that the fees are accounted for there are some other potential problems.

1) You may not making a fair comparison by comparing the mutual fund to an index that is much different. For example if you are looking at a mutual fund that mainly buys small cap stock then its performance may be much different than a total stock market index fund.

2) You may only be seeing a few of the funds that existed 10 or 20 years ago. Many mutual fund companies will start up lots of funds and just buy random chance some will over or under perform. The once that underperform quietly disappear so it looks like the fund did pretty well overall. This is call survivorship bias.

https://www.bogleheads.org/wiki/Survivorship_bias
User avatar
Raymond
Posts: 1647
Joined: Mon Apr 16, 2012 6:04 am

Re: Are funds with a load really that bad?

Post by Raymond »

Here are the links to Morningstar's "Growth of $10,000" charts for the two mutual funds mentioned above, compared to their respective indices and stock categories:

Alger Small Cap Focus A (AOFAX) - Performance

BlackRock Mid-Cap Growth Equity Inv A (BMGAX) - Performance

Note that these do not take loads into account, per Morningstar:

"Data Definitions"

Growth of $10,000
The Growth of $10,000 graph shows a fund's performance based on how $10,000 invested in the fund would have grown over time. The returns used in the graph are not load-adjusted. The growth of $10,000 begins at the date of the fund's inception, or the first year listed on the graph, whichever is appropriate.
"Ritter, Tod und Teufel"
Jags4186
Posts: 5233
Joined: Wed Jun 18, 2014 7:12 pm

Re: Are funds with a load really that bad?

Post by Jags4186 »

BV3273 wrote: Fri Jul 19, 2019 6:47 pm
Jags4186 wrote: Fri Jul 19, 2019 6:36 pm OP, don’t be shy. Please post the funds you are looking at.

There are plenty of active funds that have outperformed their benchmark index funds, even with loads. The problem is that there are way more than have underperformed their benchmark index. And many times active funds have for a time outperformed their benchmarks only to have their performance come back down to earth or significantly underperform after some time. You can invest with loaded actively managed funds, but the odds of beating the index going forward are not good.
Will do. Here they are:

AOFAX
BMGAX
AOFAX looks like a US Small Cap Growth Fund. From April 2008 (inception) - June 2019, $10,000 invested grew to $56,209 — once you subtract the $525 for the initial load and only having $9575 invested.

VSGIX is Vanguard’s US Small Cap Growth Fund. Over the same time period $10,000 grew to $58,704.

BMGAX is a US Mid Cap growth fund. From Jan 1998 (Vanguard’s MidCap Growth Fund’s inception) thru June 30, 2019 $10,000 grew to $71,877, again after you take out the $525 load.

VMGRX, Vanguard’s Mid Cap growth fund over the same time period $10,000 grew to $84,906
Topic Author
BV3273
Posts: 716
Joined: Mon Oct 19, 2015 7:20 pm

Re: Are funds with a load really that bad?

Post by BV3273 »

How about FOCPX & FIVFX
MotoTrojan
Posts: 10709
Joined: Wed Feb 01, 2017 8:39 pm

Re: Are funds with a load really that bad?

Post by MotoTrojan »

BV3273 wrote: Fri Jul 19, 2019 7:20 pm How about FOCPX & FIVFX
Just accept that it is never a good idea to pay a load and you'll do much better.
User avatar
nisiprius
Advisory Board
Posts: 42243
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Are funds with a load really that bad?

Post by nisiprius »

Consider what Charles and Susan Ellis wrote about load funds in New York magazine:
Conventional mutual funds may be the only firms in town which, if they raised the price of their merchandise, would sell more of it. The reason is that built into the price of each share is a hefty sales commission that has proved, over the years, to be a powerful incentive to a legion of hard-selling salesmen….

No-load funds in general are no better than load funds in general, but the point is—as proved year after year by Forbes magazine and others—that they are no worse either. Why anyone would want to invest $1,000, say, in a load fund, knowing that only $920 of it will go to work for him, when he could invest the same amount in a no-load and see the whole $1,000 invested, is beyond us.
By the way, they wrote that in 1972. Forty-seven years ago.

And whatever slim justification loads might have had in 1972, they don't have it any more.

To put the best possible light on the matter, the purpose of the load is to pay advisors to bring certain mutual funds to your attention. That is, you might not learn about the fund if an advisor didn't tell you, and the fund pays the advisors for their valuable service. A more cynical light is that it is like the "spiffs" or SPFs that companies pay salespeople in stores to recommend their products to customers.

Now, in 1972 it was actually a little hard to learn about a no-load fund. You needed to read a financial magazine or newspaper, spot an ad in it, and directly contact the mutual fund company to open an account. So, certainly, it was easier to learn about them through an advisor than to do the legwork yourself.

This all changed in 1992 when Schwab introduced OneSource, its mutual fund supermarket that allowed customers to invest in mutual funds directly via a brokerage account, including hundreds of no-load funds. Virtually all other brokerages followed suit.

It changed even further in the late 1990s when all the big brokerages introduced web access.

Since then, it has been trivially easy for anybody to learn all about no-load funds themselves. Load fees were unjustified in 1972 when Charles and Susan Ellis wrote about them, but they are obscene today. There's no justification for them other than as a bribe spiff to salespeople.

Andrew Tobias also spoke in plain words. This is from the 2005 edition of The Only Investment Guide You'll Ever Need, but I think he's been saying it for much longer than fourteen years:
The first step in choosing among mutual funds is about the only one that is at all clear-cut. There are funds that charge individual sales fees of 3% or more, known as the “load”; and there are others that charge no load. Choose a no-load fund. To do otherwise is to throw money out the window.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
willthrill81
Posts: 21525
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Are funds with a load really that bad?

Post by willthrill81 »

BV3273 wrote: Fri Jul 19, 2019 7:20 pm How about FOCPX & FIVFX
As noted above, what about all of the other actively managed funds with loads that disappeared along the way? These are some of the very few that survived (i.e. survivorship bias). There is no evidence that these funds will continue to outperform going forward.

Speaking of which, let's take a look at FOCPX. From 2000-2009, its return was almost 1% less than Vanguard's S&P 500 index fund (VFINX), and it's maximum drawdown was -66%. Would you have been able to hold on to this fund if it lost two-thirds of its value in two years?

Since 2000, FIVFX has underperformed the same S&P 500 fund by 1.5% annually, never mind the 5.25% load to get into FIVFX.

Uh uh.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
User avatar
dogagility
Posts: 1149
Joined: Fri Feb 24, 2017 6:41 am

Re: Are funds with a load really that bad?

Post by dogagility »

Yes... that bad.
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
User avatar
Stinky
Posts: 5927
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: Are funds with a load really that bad?

Post by Stinky »

Jags4186 wrote: Fri Jul 19, 2019 7:13 pm
BV3273 wrote: Fri Jul 19, 2019 6:47 pm
Will do. Here they are:

AOFAX
BMGAX
AOFAX looks like a US Small Cap Growth Fund. From April 2008 (inception) - June 2019, $10,000 invested grew to $56,209 — once you subtract the $525 for the initial load and only having $9575 invested.

VSGIX is Vanguard’s US Small Cap Growth Fund. Over the same time period $10,000 grew to $58,704.

BMGAX is a US Mid Cap growth fund. From Jan 1998 (Vanguard’s MidCap Growth Fund’s inception) thru June 30, 2019 $10,000 grew to $71,877, again after you take out the $525 load.

VMGRX, Vanguard’s Mid Cap growth fund over the same time period $10,000 grew to $84,906
It’s really, really hard to overcome the dual headwinds of front end loads and high fund expenses.

These two funds came close, but they didn’t do it.

Past results are not a prediction of future performance.
It's a GREAT day to be alive - Travis Tritt
Jags4186
Posts: 5233
Joined: Wed Jun 18, 2014 7:12 pm

Re: Are funds with a load really that bad?

Post by Jags4186 »

BV3273 wrote: Fri Jul 19, 2019 7:20 pm How about FOCPX & FIVFX
You can go to Morningstar and find every single active fund that has outperformed it’s benchmark with a few clicks of the button. The fact that the first two funds you had me look up which you said outperformed the indexes both *did not* outperform the indexes tells me that you definitely should not considering investing in actively managed, loaded funds.
User avatar
prudent
Moderator
Posts: 7701
Joined: Fri May 20, 2011 2:50 pm

Re: Are funds with a load really that bad?

Post by prudent »

Here's the way I look at loads.

Let's say the load fund outperforms its comparative index by 1% a year. It will take the load fund 11 years to close the gap because of the load.

If it outperforms by 1.5% a year, it will take 7 years just to catch up to the index fund. This would make the fund a superstar and yet after 7 years it's just drawing even with the index fund.

If it outperforms by 2% a year, it still takes 6 years to make up the gap.

So look at how long even a great fund, with solid outperformance, would take just to make up for the initial load.

And since we know there are very, very few actively managed funds that can generate that kind of superior performance, I ask myself "Am I smart enough to pick them out?" I know the answer is no. I'll take the index fund. No sense digging a hole right out of the gate by paying a load.

The saying these days is that load funds aren't bought, they are sold. (in other words, they exist because advisors push them onto clients, not because investors are seeking out load funds)
Topic Author
BV3273
Posts: 716
Joined: Mon Oct 19, 2015 7:20 pm

Re: Are funds with a load really that bad?

Post by BV3273 »

Thanks all! I figured I was missing something. That’s why I love this site.
tesuzuki2002
Posts: 1149
Joined: Fri Dec 11, 2015 12:40 pm

Re: Are funds with a load really that bad?

Post by tesuzuki2002 »

Were you comparing the exact same dates when comparing their performance?? Down to the day. It does matter.

Also, yes! Loaded funds really are that bad.
User avatar
macandal
Posts: 79
Joined: Thu Mar 31, 2016 1:58 pm
Location: San Francisco, CA, USA

Re: Are funds with a load really that bad?

Post by macandal »

BV3273 wrote: Fri Jul 19, 2019 7:20 pm How about FOCPX & FIVFX
FOCPX is a no-load fund.
illumination
Posts: 970
Joined: Tue Apr 02, 2019 6:13 pm

Re: Are funds with a load really that bad?

Post by illumination »

If the rate of return exceeds the benchmarks even with the extra fees and sales load, of course it's worth it.

But which funds will have this outperformance in the future and for how long? Nobody can answer that.

So what you can analyze is how well these actively managed funds perform historically (I'm assuming all funds you're looking are with sales load are actively managed). The stats I've seen show about 80-90% of them underperform an underlying index fund when you look at a several year timeline. If a sales load is included (and not just the higher expense ratio) I bet the odds are approaching something like 95%+.

I'm not someone that believes it's impossible to outperform the market, I think some people do have a record that you can't just chalk up to luck. I just don't know how to find these people beforehand and/or know how long their streak can go on. And my odds for picking a winning fund are around 90% rate of failure if I'm going by the stats.
KyleAAA
Posts: 8643
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Are funds with a load really that bad?

Post by KyleAAA »

No. The existence of a load has no impact on the fund itself. A loaded fund can be good. But that doesn't help you, the investor, since you have to pay the load. If you could identify in advance which loaded funds would out-perform by enough to make it worth paying the load, it would be wise to pay the load. So far, nobody has figured out how to do that.
User avatar
Wiggums
Posts: 2960
Joined: Thu Jan 31, 2019 8:02 am

Re: Are funds with a load really that bad?

Post by Wiggums »

Because mutual funds can be purchased in partial share increments, it’s better to look at a load from the standpoint of the total investment. Let’s look at an example where an investor is interested in investing $10,000 in a particular fund that charges a 4% front-end load. In this example, of the entire $10,000 investment only $9,600 will be invested into the fund. The remaining $400 is paid as a sales charge (or commission) to the fund company.

To break even, the fund balance needs to get back to your original investment amount ($10,000), an increase of $400. Now imagine if your investment was $100k. You would break even with an increase of $4,000.

If the fund loses value, you’re down $4,000 more than an Equivalent no load fund.
User avatar
LilyFleur
Posts: 1577
Joined: Fri Mar 02, 2018 10:36 pm

Re: Are funds with a load really that bad?

Post by LilyFleur »

illumination wrote: Thu Jan 02, 2020 3:41 pm If the rate of return exceeds the benchmarks even with the extra fees and sales load, of course it's worth it.

But which funds will have this outperformance in the future and for how long? Nobody can answer that.

So what you can analyze is how well these actively managed funds perform historically (I'm assuming all funds you're looking are with sales load are actively managed). The stats I've seen show about 80-90% of them underperform an underlying index fund when you look at a several year timeline. If a sales load is included (and not just the higher expense ratio) I bet the odds are approaching something like 95%+.

I'm not someone that believes it's impossible to outperform the market, I think some people do have a record that you can't just chalk up to luck. I just don't know how to find these people beforehand and/or know how long their streak can go on. And my odds for picking a winning fund are around 90% rate of failure if I'm going by the stats.
This classic investment book addresses this:
https://www.amazon.com/Random-Walk-Down ... b_title_bk
There is a really good analysis of actively-managed funds vs. index funds.
ohai
Posts: 1327
Joined: Wed Dec 27, 2017 2:10 pm

Re: Are funds with a load really that bad?

Post by ohai »

nisiprius wrote: Fri Jul 19, 2019 7:25 pm
To put the best possible light on the matter, the purpose of the load is to pay advisors to bring certain mutual funds to your attention. That is, you might not learn about the fund if an advisor didn't tell you, and the fund pays the advisors for their valuable service. A more cynical light is that it is like the "spiffs" or SPFs that companies pay salespeople in stores to recommend their products to customers.
This is one of the most egregiously predatorial statements I have read in finance. They are writing as if it's the investor's responsibility to pay the marketing cost of these random funds. Imagine if door-to-door salesmen visited you, and then claimed that you should pay them for "bringing the product to your attention". We complain about throwaway writing standards in modern media, but old publications are worse!
scubadiver
Posts: 1193
Joined: Sun May 04, 2008 9:48 pm

Re: Are funds with a load really that bad?

Post by scubadiver »

scubadiver
Last edited by scubadiver on Sun Jul 12, 2020 12:31 pm, edited 1 time in total.
deltaneutral83
Posts: 1731
Joined: Tue Mar 07, 2017 4:25 pm

Re: Are funds with a load really that bad?

Post by deltaneutral83 »

So these two funds OP mentioned were beaten by the indexes and were steamrolled if in a taxable ?
Post Reply