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By Russel Kinnel and Christine Benz | 08-17-2016 02:00 PM

No-Load Investors: Don't Ignore These 3 Load Funds

As more load shops join no-transaction fee platforms, Russ Kinnel thinks investors should take a look at some attractive funds that are now available without their usual sales charges.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Mutual funds that formerly carried loads, or sales charges, are increasingly available without those loads. Joining me to discuss this trend is Morningstar's director of manager research, Russ Kinnel.

Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: Russ, every time we talk about some sort of a load fund on Morningstar.com, I hear from readers who say, why would anyone pay a load, why do people put up with this? Let's discuss from a practical standpoint. How many investors are actually paying that full freight these days?

Kinnel: That's right. Most people in load funds are not paying the full rate. The ICI estimates that currently the average fee paid by a front-load investor in equity is 1.1%. In bonds it's about 0.7%. So, that's really come down over the years for a number of reasons.

Benz: Let's talk about some of those reasons. Why is this happening? Why are investors able to get in these funds but not paying that sales charge?

Kinnel: That's right. So there's a couple of big trends. One is just simply the line between load and no-load is blurring both in terms of sales channels and what funds are available. So, really, you see it no longer matters that much. If you go to an array of advisors, many of them can pick from a really big array of no-load, load, and even institutional funds. So that matters less. And then the other part that's going on is, if you meet certain minimums, you can pay a lower level of load which is how you can get to say, pay 1% or none. So, for instance, if you're going through an advisor and you're investing over $1 million, you probably pay no load. If you invest half a million, you pay half a load. If you're going through a 401(k) plan that has more than $1 million, even if your sum is only $20,000, you probably aren't paying any load either. So there are a number of ways to get around paying that full freight.

Benz: And wrap accounts have a role here, too, that advisors are increasingly using these sort of all-in-one accounts where the investor pays sort of, maybe 1% per year for that all-in-one management, but sometimes those sales charges are waived, right?

Kinnel: That's right. So, wrap accounts, you'll see instead of having a front-load sales commission, there's maybe 1%, and incidentally, lots of no-loads are sold that way too. So, when you look at just the front load, it can in a way overstate what a load fund is charging and understate what a no-load fund is charging, because a huge amount of money that goes into no-load funds is going through these wrap programs. So, really, they are on a little more even footing, and of course, it depends for every investor what's available to them depending on what amount of advice they want, what sales channels they are going through, but really the lines are blurred tremendously.

Benz: One other embodiment of that trend is that we are seeing some formerly load funds pop up on brokerage firms' platforms without a sales charge, without any sort of transaction fee. Let's talk about that and why that's happening. What's in it for fund companies to make their products available on these platforms?

Kinnel: That's right. If you invest through a no transaction fee platform, it's definitely worth checking some fund companies you probably haven't even looked at in a long time because more and more are gravitating to these NTF programs. And as I mentioned, because the lines are blurred, fewer sales channels, fewer advisors are going to get bothered if, say, a traditional load shop is now available on no-load or vice versa. It used to be that load shops were very wary of going there because then they would get pushback from advisors who might hear from their clients, why did I pay a load, because I see this is available for no load. Now a lot of those lines are blurred, and so we're seeing more and more traditional load shops come into NTF programs.

Benz: Before we go any further, let's just give some examples of NTF programs. Schwab is a biggie; Fidelity obviously has a big brokerage platform. You're talking about firms like that, right?

Kinnel: That's right. TD Ameritrade, Vanguard, and T. Rowe even have smaller versions of their own NTF platforms. So from a lot of the big brokerages that are self-directed you've got a tremendous array of funds where you don't have to pay any additional fee besides the expense ratio.

Benz: Some firms have bucked this trend. What fund firms to-date will you not find on these NTF platforms?

Kinnel: Right. So some of the biggest are still not there. For instance, American Funds, Franklin, and MFS are three of the biggest ones. Perhaps they still would face too much backlash if they went over into no-load space. So they haven't done it, but quite a lot of the rest of the load space has.

Benz: Is that possible they don't feel like they need the marketing as much or they don't need the extra distribution channel?

Kinnel: It's possible. Maybe it's not worth the effort for them because they're so focused because they have such broad distribution networks already. I'm not sure.

Benz: OK. So you brought some of the funds that you think are compelling that investors ought to look at if they are no-load investors using one of these NTF platforms. You brought a short list of funds that you think are interesting. A couple of them are large-cap value. So, let's start with Invesco Diversified Dividend. Let's discuss that product and why you and the team think it's a good option.

Kinnel: Yeah, it's a really good fund run by Meggan Walsh, who's been at our conference. You can probably see some videos where we did interviews with her on Morningstar.com. She's just a really good investor with an outstanding track record. She's in the top decile overall of the trailing time period, just done a great job with a dividend value strategy, pretty straightforward fund. And the fund only charges 83 basis points for the A shares. So, we think of load funds as having higher fees and they often do even excluding the front load itself because they have 12b-1 fees. But in this case, it's a really reasonable 83 basis points.

Benz: Another large-cap value option, JPMorgan Value Advantage. Let's talk about that one.

Kinnel: Yeah. This one's a nice steady fund. JPMorgan runs very predictable style, consistent funds, and this is a good example. We rate it Silver. It's run by Jonathan Simon. It's also had really good performance, but again kind of a nice core kind of almost quality--I usually think of quality as a little more in the blend and growth, but well-run companies, good cash flow, trading at decent prices, so kind of a nice core holding. Not as good a bargain. It charges 1.25% expense ratio. So, a little on the pricey side, but still a really good well-run fund from JPMorgan. And I think both JPMorgan and Invesco are worth checking out if you're in those NTF programs because they do have a number of good funds in them.

Benz: So investors who had completely written them off because they said, well, I'm a do-it-yourself investor, those are load shops, should maybe take another look.

Kinnel: That's right.

Benz: The final fund we want to talk about is Western Asset Managed Municipals, a bond fund, a municipal bond fund. Let's talk about that one.

Kinnel: Yeah. In a lot of the NTF programs it's hard to find a lot of good muni funds other than those managed in-house. In other words, if you're going through the Fidelity platform, Fidelity has got great muni funds, but there aren't a lot of others because of course Vanguard is not in the NTF program. But Western Asset is a good example of a load shop where it--mostly it's institutional but they also have load share classes that are now in NTF programs. This fund charges 66 basis points. It's Western Asset Managed Municipals. We rate it Bronze. It's a nice conservative fund in terms of credit quality. They are a little more aggressive in terms of adjusting duration. Most muni managers don't really do much with duration. They'll do a little more with that, and they'll do some Treasury shorts even. So it's conservative on the quality side, a little more aggressive than some of the macro calls though.

Benz: So, in terms of Vanguard, just backing up, you would find Vanguard funds in Vanguard's NTF platform, right?

Kinnel: For sure. Right. So, if you're in Vanguard, you can take advantage of their great bond funds. If you're in Fidelity, you can take advantage of their great ones. But you don't see a lot of outside attractively priced bond funds, and the reason partly is because the NTF programs want compensation and it makes it hard to have a cheap expense ratio on an NTF platform for bond funds.

Benz: OK. Thanks Russ. Really interesting topic here. I think something that no-load investors should keep an eye on. Thanks for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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