Are funds with a load really that bad?

[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]

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?

[prudent]

When you say the load funds did 5%-10% better than index funds, over what period of time was that?

[willthrill81]

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.

[mcraepat9]

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.

[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]

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]

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.

[BV3273]

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

[Watty]

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

[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.

[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.

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

[BV3273]

How about FOCPX & FIVFX

[MotoTrojan]

How about FOCPX & FIVFX

Just accept that it is never a good idea to pay a load and you'll do much better.

[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.

[willthrill81]

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.

[dogagility]

Yes... that bad.

[Stinky]

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.

[Jags4186]

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.

[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)

[BV3273]

Thanks all! I figured I was missing something. That’s why I love this site.

[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.

[macandal]

How about FOCPX & FIVFX

FOCPX is a no-load fund.

[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]

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.

[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.

[LilyFleur]

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]

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]

scubadiver

[deltaneutral83]

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