More and More Funds Are Getting Loaded

Has the no-load fund revolution run out of gas?

Last week, Kobrick Funds and Gabelli Asset Management (GBL), both no-load mutual fund companies, announced plans to add loaded share classes and sell their funds through brokers. On Oct. 11, First Eagle Funds, a fledgling no-load money manager, purchased a majority stake in broker-sold international specialist SoGen Funds.

They are just the latest in a steady stream of no-load companies trying to get a foot in the door of a business once thought to be headed for extinction. With no upfront sales charge and lower overall costs, no-load funds were supposed to bury their broker-sold cousins. The rise of the low-cost investing opportunities via the Internet was going to be the final nail in the coffin.

But sales of no-load funds have leveled off with a market share that has hovered around 40% for the past three calendar years. And that total may be overstated because it includes sales of no-load funds made through fee-based advisers. The figure representing investment by do-it-yourself investors may be as low as 20%.

Meanwhile, broker-sold funds continue to outnumber no-loads, 3,143 to 2,281, according to Morningstar. And looking at total assets, load funds lead no-loads $1.8 trillion to $1.4 trillion, according to Boston-based Financial Research Corp.

Loads Lead Assets in load funds continue to outpace those in no-load funds.
*Through June 30. Source: Financial Research.

What happened?

A universe of more than 7,000 mutual funds, complex tax issues, rising portfolio assets and shrinking time horizons have driven do-it-yourselfers into the arms of professionals who can offer investing advice. Often, they are brokers who are paid through the sales charges -- or loads -- tacked onto mutual fund sales. But they also can be financial advisers who sell no-load funds and charge a fixed fee for their advice. Either way, "the avalanche of information out there will continue to raise the demand for advice," says Marilyn Dimitroff, a financial planner in Bloomfield Hills, Mich.

And as direct sales are dominated by a small circle of companies -- Fidelity, Vanguard and Janus control 25% of all mutual fund assets, according to Financial Research -- smaller no-load companies are finding it harder to survive on direct sales alone.

"Fund companies don't really want to sell their funds direct. True direct sales are expensive because building relationships on a client-by-client basis is not as efficient as building relationships through brokers," says Steve Gibson, chief executive of $62.7 billion Liberty Funds Group, which sells funds both direct and through brokers.

"At some point people can't do it themselves. So, if you're a fund company and you're looking for asset growth, you need to include the traditional broker channel," says Dennis Gallante, a consultant and fund researcher at Boston-based Cerrulli Associates.

There are a few ways no-load companies are changing their stripes:

Launch a separate line of broker-sold funds. Fidelity, the largest fund firm with $579.1 billion, launched Fidelity Advisor funds -- a separate family of 41 broker-sold funds -- in 1986. Since then, the Advisor funds have amassed $63 billion in assets. If it was a separate company, the Advisor funds would rank fifth in sales among all fund companies this year through July, according to Financial Research. Fidelity's more established direct funds currently rank third in sales.

Launch new, loaded share classes of existing funds. The most common way to do this is to add Class A, B and C shares, which charge loads or higher annual fees to pay a broker's commission, and later retire the no-load share class. Typically when this happens, current shareholders can continue investing without paying a load, but new shareholders cannot. Franklin Templeton Funds (BEN) used this method to convert Michael Price's Mutual Series funds to the broker channel in 1998.

Gabelli has added loaded shares to its global funds, but will still allow new investors to buy shares without a load.

Clone loaded versions of existing no-load funds. Boston-based Nvest, which owns 18 direct and broker-sold fund groups, took this approach to bring four Oakmark and two Loomis Sayles no-load funds to the broker-sold channel. In December 1998, Nvest simply created six new clone funds with their broker-sold New England Funds brand, each investing all of its assets in a specific Oakmark or Loomis Sayles Fund.

Subadvise a load fund. Former standout (JAVLX)Janus Twenty manager Tom Marsico now offers two no-load funds under his own name ((MFOCX)Marsico Focus and (MGRIX)Marsico Growth & Income), but also manages two broker-sold Nationsbank Advisor funds and co-manages a broker-sold fund for SunAmerica.

Scan the roster of money managers for AmericanSkandia, which sells mutual funds and variable annuities through brokers, and you'll find plenty of no-load firms, including Janus, T. Rowe Price (TROW), Scudder, INVESCO and Marsico.

Merge with a broker-sold firm. When no-load Scudder merged with broker-sold Kemper Investments in 1997, the firms launched new funds for the broker channel and converted three no-load Scudder funds to Kemper's broker-sold brand.

Merging might make the most sense for no-load companies because selling through brokers, while staying in the direct-sold channel, can be an expensive challenge.

"You need wholesalers, two separate marketing departments, and two separate executives, each focused on one channel," says Peter Greenley, a spokesman for no-load Montgomery Funds.

Some industry insiders predict some of the biggest no-load names will make moves into the load business. "You'll see Janus and others developing wholesaling forces," asserts Burt Greenwald, a Philadelphia-based fund consultant. Liberty's Gibson says Janus and T. Rowe Price are both weighing broker-channel entrances. Both firms, through spokesmen, denied they were weighing an entrance into the broker-sold market.

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