Explain A, B, C share classes of load funds, please

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nisiprius
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Explain A, B, C share classes of load funds, please

Post by nisiprius »

No, no, no, I'm not planning to buy any. But I suddenly realized I know virtually nothing about them.

Most load funds come in a variety of different share classes, in which the load is assessed in different ways. The classes are often designated by letters, class A, B, C, etc.

1) Are there official standards for what A, B, C, etc. mean? Or is it like decaf coffee being sold in green cans--the funds can do anything they like and just happen to follow a loose tradition?

2) Where do I go for succinct summary of what the class designations mean?

3) In most cases, the reason I want to know is that I want to use Morningstar to look at them and I want the oldest one--the one that goes farthest back. Often that seems to be class C. Or isn't that so? If it is so, does anyone know why?
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Post by livesoft »

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Post by sscritic »

Google: mutual fund classes a b c

http://www.investopedia.com/articles/mu ... z1XglMemaU

or wikipedia
Typical share classes for funds sold through brokers or other intermediaries are:
Class A shares usually charge a front-end sales load together with a small 12b-1 fee.
Class B shares don't have a front-end sales load. Instead they, have a high contingent deferred sales charge, or CDSC that declines gradually over several years, combined with a high 12b-1 fee. Class B shares usually convert automatically to Class A shares after they have been held for a certain period.
Class C shares have a high 12b-1 fee and a modest contingent deferred sales charge that is discontinued after one or two years. Class C shares usually do not convert to another class. They are often called "level load" shares.
Class I are subject to very high minimum investment requirements and are, therefore, known as "institutional" shares. They are no-load shares.
Class R are for use in retirement plans such as 401(k) plans. They do not charge loads, but do charge a small 12b-1 fee.
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Post by LadyGeek »

Some additional insight: Class B Mutual Fund Shares: Do They Make the Grade?, from the FINRA. It's intended as a potential fraud alert, but contains practical information that goes beyond the SEC's definitions.
nisiprius wrote:3) In most cases, the reason I want to know is that I want to use Morningstar to look at them and I want the oldest one--the one that goes farthest back. Often that seems to be class C. Or isn't that so? If it is so, does anyone know why?
I don't see any relation between the share class and historical time of issue.

Also....

Wiki article link: Mutual Funds and Fees and Types of Mutual Funds
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Post by DSInvestor »

Here's a link to a summary prospectus for PIMCO Total Return Bond Fund which covers Class A, B, C, R shares and there are two tables that will show you the differences in front end load, back end load, management fee, 12b-1 fee, and total annual fund operating expenses:
http://pe.newriver.com/summary.asp?doct ... =693390445
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Post by pkcrafter »

The first open-end U.S. mutual fund was the Massachusetts Investors Trust which was established on March 21, 1924. I can't confirm, but I seem to recall this fund had a high front-end load, but I have not been able to verify.


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Post by tetractys »

I owned B shares at one time, and found this out:

A shares you pay the load up front.
B shares you pay the load plus interest over time through an increased 12b1 fee; effectively a oversized load extracted from the rear, along with an added withdrawal fee when you discover its better to get it over with sooner than later.

C shares? Not sure.

Try this: http://www.finra.org/Investors/protecty ... ds/p006022 -- Tet
Last edited by tetractys on Sun Sep 11, 2011 9:47 pm, edited 1 time in total.
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Post by thirdman »

There are also Class D shares which do not have a load, front end or back end, but often carry a higher expense ratio.
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Post by Opponent Process »

I remember these and I know they're still around. just seems like another ripoff from a bygone era before people started informing themselves. buying funds from a salesman, like getting milk from the milkman or having someone pump your gas for you. the system is now summarized as: avoid this scheme and simply buy pure no-load funds (pump your own gas-you can do it!). I think this has been the general advice for at least a decade now; it was certainly the advice when I started in 2001. fund shops that still have these just seem sleazy and antiquated, like they can't keep up with these low-cost times. like they still have rotary phones sitting on their desks. it's really insulting to a person's intelligence, which doesn't seem like a great way to do business.
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Post by nisiprius »

:oops: livesoft and sscritic, thank you for not sending me to lmgtfy.com. From the "usually" language in investopedia, "might" in the SEC, and "typically" in the FINRA article, I gather that it is like green cans for decaf--not a regulated standard, just a customary practice.
Opponent Process wrote:I remember these and I know they're still around. just seems like another ripoff from a bygone era
The debate on sales loads should have been settled back in the 1970s, of course.
In 1972, in New York magazine, Charles and Susan Ellis wrote:
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.
Andrew Tobias wrote--from the current edition of "The Only Investment Guide You'll Ever Need" but I'll bet the identical language is in the original edition--
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.
Rather surprisingly, Malkiel, in A Random Walk Down Wall Street, is totally dismissive of front-end loads, but in the 2007 edition--in a remark that seems to have been added since the 1999 edition, which doesn't contain it--says back-end loads and exchange fees "discourage short-term trading and are not a problem for long-term investors."

Logically, though, it's closely related to the active-versus-passive debate. The load is just another expense. If you actually believe that managers can add alpha, you could believe they add enough alpha to overcome that expense, too. If you intend to hold a fund for ten years, a 5% load is no worse than 0.5% on the expense ratio--perhaps much better if the fund grows. It's a poisonous expense because it doesn't pay the managers who supposedly provide that value, so one could theorize that a no-load fund with 1.5% ER could afford to pay better managers than a load fund with a 1% ER. In reality I believe that added alpha is always less than expenses--the fund company takes all the value it adds for itself, and more, rather than passing it on to shareholders. But if one believed in active funds--or an active fund--it would not be illogical to pay a load. The usual salesperson's hypothetical: "if this fund can make you more money, why wouldn't you be happy to pay the load?"

One could even argue that the sales fee is not always utterly wasted, because you do need to learn of a fund's existence before you can buy it. Pretty weak in these days of the Internet but there are some interesting old magazine articles about people trying to buy no-load funds. Brokerages--talk over the phone or face-to-face--were the investor's typical point of entry and they wouldn't tell you about no-load funds. You had to spot a little ad in a magazine, write a letter, get a brochure, etc. Ads to have a service component, and it's hard to tell where service leaves off and promotion begins--direct-to-consumer drug company ads would be an example of something exactly in the grey area.
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Post by Dandy »

In the old days funds were sold only with a steep front end load. Sometimes as high as 8%. When funds became more popular - I think around the early 80's fund families started offering "B" shares (the front end sold funds became "A" shares).

B shares are sold without a front end charge which made them easier to sell. In order to compensate the fund for fronting the brokerage commission, the funds had a Contingent Deferred Sales Charge (CDSC) and a 12-b1 fee. The 12b-1 fee lowered the dividend on B shares. The CDSC charge only went into effect if the investor decided to redeem before a stated period. That period was sometimes as long as 8 years -it was long enough to payback the fronting of the commissioons . The potential charge usually dropped each year (excluding any time money was exchanged out of a CDSC fund into a money market fund). The fund usually kept the 12-b1 fee so the Class B shareholders always had a lower dividend and total return than the class A shareholders (exluding the front end commission). This arrangement was very profitable for the funds and the broker -- but not the investor.

Eventually, funds were forced to convert B shares to A shares after the funds had been fully reimbursed for the fronting of the commissions.

As you can imagine this complex arrangement made it easier to sell than a 3 or 4% front end charge but was a servicing nightmare. People would redeem and be hit with a CDSC charge that they weren't aware of (forgot or broker didn't tell them??) Also, some would forget that time in a money market fund didn't count toward lowering the CDSC and would hit the roof when they got charged.

C shares never really caught on. They were a highbred between A and B. Usually, a !% front end charge and a 1% CDSC only if redeemed in the first year.

B shares is a great example of the lengths firms will go to entice people into buying their products in this case by hiding their fees so the expense was "painless".
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Post by stratton »

There is also other considerations.

People that want Templeton Global Bond often buy the CEF GIM which is similar. Same manager etc., but GIM is trading at a premium larger than the front end load on TPINX. The ER is a little lower with GIM, but you're subject to the inherant extra 65% volatility becaue of the CEF premium/discount structure of GIM.

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