Eric's Load No-Load Page

Eric's Load No-Load Page

Here's a good link that discusses the issue pretty well:

http://www.seninvest.com/article1.htm

Here's my perspective:

First, let me say that in the past, before I knew better, I invested in load funds. The load funds that I've invested in included:

Fidelity Magellan
Fidelity Equity-Income
Fidelity Overseas
Pacific Horizon Aggressive Growth
Merrill Lynch Pacific
Scudder Japan Fund

The reason that I picked those particular funds is because of their (then) recent stellar performance. I told myself that I was willing to pay a load in return for spectacular returns. The Merrill Lynch fund had a front-end load of eight percent! I was willing to pay it because I believe that the fund was the absolute number one best performing fund the year before, returning about 85% (likewise, I think for the Fidelity Overseas and Pacific Horizon)!. All this was when I was an investment novice in my early 20s. I reasoned that paying an eight percent load was an easy down payment on an expected annual return of 85%!

My logic was flawed. I failed to heed the old mantra -- "past performance is no guarantee of future returns". Perhaps predictably, none of these investments lived up to my high aspirations and I lived to regret paying the loads in each case, except perhaps with Magellan, which has been an exceptional performer fairly consistently since the mid-60s.

I also told myself that load funds and no-load funds were just different means of compensating fund management for their management efforts. I told myself that load funds must have lower annual maintenance expenses than no-load funds and that both fee mechanisms (i.e., load and no-load) would basically result in the same total amount of fees, in the end.

My logic was again flawed. It turns out that sales loads don't go to the fund managers at all! They either go to the broker/investment advisor who sold you the fund, as a commission, or, as was always the case with me, it went directly to the profitability of the mutual fund company sponsoring the fund (e.g., Fidelity). Annual maintenance fees, it turns out, are totally independent of whether or not there was a sales load on the fund. There are load funds with high annual maint fees and with low annual maint fees. Likewise, there are no-load funds with high annual maint fees and with low annual maint fees.

I came to see that loads are a pure profit mechanism for somebody other than me (and consequently a pure loss mechanism for me). Given that there are high performing no-load funds just as there are high performing load funds, it seems foolish to pay loads when you don't have to. Indeed, the very fact that you pay a load conspires to prevent load funds from out-performing no-load funds when you take the load into account, which you must for an accurate comparison.

Also, whether you have a load or not has nothing to do with whether the fund is actively managed. Most mutual funds are actively managed, regardless of load. The only ones that are not actively managed are those known as "index funds". The "C" fund in the federal government's Thrift Savings Plan is an example of an index fund. Most index funds are no-load and also have the advantage of extremely low annual maintenance fees (due to having no manager or researchers to compensate) and exceptional tax efficiency (due to almost zero turnover). All these effects, combined with the general efficiency of the US markets, makes index funds tend to outperform the overwhelming majority of actively managed funds, at least in the large US equity and US corporate bond asset classes, and less so in smaller US equity and International asset classes.

The bottom line is that loads and other investment expenses are best avoided. This is what I like most about Vanguard. They are absolutely obsessive about keeping their expenses and fees down. All their funds are no-load funds. They charge no 12b(1) fees. Their annual maintenance fees are by far the lowest in the industry (including an incredibly low 0.17% for their Index 500 fund, the lowest maintenance fee of any fund in the industry, which incidentally has outperformed well over 90% of all other equity mutual funds over the last ten years). Their variable annuities have no surrender fees whatsoever (compared with as high as 5% charged by Fidelity and higher at many other places).

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This page last updated 01/04/02