July 30, 2003
The ABCs of SRI Mutual Fund Share Classes
by William Baue and Mark Thomsen
The complexities of different share classes, or fund loads, can confuse investors--brokers and
finance writers can either help clarify and further obfuscate.
Scanning the fund performance
page on SocialFunds.com, readers may notice that many of the mutual funds appear more than once,
with an "A," "B," or "C" behind the name. These letters refer to different share classes, which
correspond to the fund's sales charge, otherwise known as its load. This fee goes to the mutual
fund firm, with a portion going to the broker or financial adviser who actually bought the shares
for the client. The share classes differ according to when the sales charge is applied.
Funds that assess a sales charge at the time of purchase are called front-end load
funds, and are often labeled Class A shares. These charges usually range from two to five percent
of the purchase. Sales charges assessed when an investor sells the fund are called back end or
deferred load funds, and are often labeled Class B shares. The more technical name for them is
contingent deferred sale load (CDSL) funds. Funds that assess a small sales charge upon purchase
and a small charge each year afterward, typically about one percent, are called level load funds,
and are often sold as Class C shares.
"All share classes are the same fund and, without
any expenses, should have identical performance," said Richard Barr, an investment advisor with the
First Affirmative Financial Network
(FAFN) and Cambridge Investment
However, the different expenses do lead to different performance, depending
on how long the investor holds the fund. These differences can confuse investors who do not
understand the relative benefits and liabilities of each share class.
"In almost all
cases, the A shares are the best deal for the client," Mr. Barr told SocialFunds.com. "A shares
should be investors' first choice if they will be in the fund long term."
Class B shares
represent a better value than Class A shares only for so long.
"At some point the A share
will deliver a total return to the investor that is more than the B shares--that's called the
crossover point," Mr. Barr explained. "Also, B shares can miss out on breakpoints, or discounts
for large amounts of money--another reason to avoid them.
"C shares can make sense for
someone who knows they are in it for the short term--let's say two to four years," he added.
Some brokers have been known to take advantage of the complexity of different share classes.
"The B shares are sold by brokers because it's easier to sell funds without front end
loads, and clients mistakenly think they are getting no-load funds," said Mr. Barr. "Nothing could
be further from the truth because their return is smaller than the A shares."
been a big crackdown in the selling of B shares in the industry by the NASD, although they are
still quite legal and are still sold frequently," he said.
Reporters have also been known
to distort the complexities of different share classes, whether inadvertently or intentionally.
"Writers would report all share classes if they want the report to be comprehensive," Mr.
Barr said. "Or, in the case of [an article that appeared in a financial publication earlier this
month], a reporter might report the share classes that best supported the point he was trying to
make, i.e. that SRI funds are expensive."
"In this case, he cited mostly B shares, which
are the most expensive class whether they be SRI or non-SRI," he added. "To report B shares
without reporting A shares in the same report is irresponsible and misleading."