Get the Lowdown on Load-Waived Fund Metrics

Question: Why does Morningstar.com include both load and load-waived share classes of funds? And how can I purchase shares in these funds without having to pay the load?

Answer: The load-waived fund pages found on Morningstar.com, which are noted by the letters "LW" after the fund's name and the characters ".lw" following its ticker symbol, provide performance metrics specific to share classes of load funds that are available load-free to some investors. Loads are sales charges investors must pay when purchasing or selling some funds, and they can run in excess of 5%. Because loads reduce investors' actual returns, the load-waived share-class pages provide investors who own such shares with a more accurate picture of how their shares have performed.

Load-waived share data is based on a fund's A shares and is calculated only for funds with front loads and that are based in the United States. Fund measures that use load-adjusted data include the Morningstar Rating for funds (also known as the star rating) and rating-related scores and returns, tax-adjusted returns, and percentile ranks associated with these measures.

It's important to note that loads are not factored into performance data found on Morningstar.com, though annual fees are. That's because annual fees don't vary from investor-to-investor within a share class whereas loads sometimes do. For example, some shareholders may pay the full load for a fund while others pay a reduced load or no load at all. However, others measures found on the site are load-adjusted, meaning they do factor in the impact of paying a load on returns and use the full load amount in doing so.

Same Fund, Different Star Rating
Because the star rating uses load-adjusted data (and also factors in redemption fees, 12b-1 fees, and expenses) in calculating risk-adjusted returns, a load-waived share class can carry a different star rating than its load-paying counterpart. For example, American Funds Washington Mutual shares (AWSHX) currently carries a 3-star rating, while the load-waived version of the fund, , garners 4 stars. In this case, the cost of paying the fund's 5.75% front-end load is significant enough to cost it a star in Morningstar's fund rating methodology. (Theoretically, the investor in the load fund would be receiving--and benefiting from--ongoing investment assistance from the broker in return for paying the load.)

Retirement Plans a Major Source of Access
So how can individual investors purchase load-waived shares of funds? One of the most common ways is through retirement plans such as 401(k)s. Rather than charge a load to each plan member, funds usually waive them in exchange for access to the plan's pool of investors. After all, load funds also charge annual fees, so the fund company still makes money. Fund companies also may waive loads for individual investors who invest large amounts. In addition, load-waived shares for some funds are offered through some discount brokerages.

As investors continue to move toward lower-cost investing options--and as the mutual fund industry continues to blur the line between load and no-load funds, as discussed in this article by Morningstar's Eric Jacobson--load funds appear to be on the wane. From 2008-11 mutual funds charging a load saw $254 billion in net outflows while no-load funds saw net inflows of $681 billion, nearly all of it from institutional shares, according to data from the Investment Company Institute. 

Investors who own load-waived shares through retirement plans or through other avenues can use the load-waived fund pages on Morningstar.com for a more accurate picture of their fund's overall performance than the data report for its non-load-waived counterpart. So when researching your load-waived fund, using Portfolio Manager, or any of the other Morningstar.com tools, make sure you use the version with "LW" at the end. Otherwise you may be looking at ratings that reflect a load you didn't have to pay.

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