American Funds to Ax B-Shares

American Funds will eliminate the B-share class on its funds, effective April 21. American Funds shareholders will be able to purchase B-shares, including reinvesting dividends and capital gains distributions, until that day.

B-shares charge back-end loads. The investor pays no sales charge as long as he or she holds the funds for eight years, after which the funds automatically convert to A-shares. However, B-shares have higher expense ratios, effectively making up for the absence of a front-end load or sales charge by embedding the load in the fund's expense ratio and deferring it over time.

The higher expense ratio works in the fund company's favor as markets rise, because spreading out the load means fundholders are paying some of the deferred load on a larger asset base. But that arrangement works in reverse in a declining market, favoring shareholders. American, like other fund companies that charge loads, likely suffered from B-shares sold over the past few years, where shareholders will pay less because the funds' asset bases have shrunk owing to the severe stock market decline.

Note: This article has been revised since original publication on April 4, 2009.Please click here for details.

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