MFS Finds New Tech Fund a Tougher Sale Than Before

Boston-based mutual fund giant MFS is boosting commissions for brokerages that sell its new MFS Technology fund, a sign that selling tech funds is not the cinch it was last year.

MFS is offering an additional 0.5% of the amount invested in class A and B shares of the fund sold during May. Fifteen brokerages are participating in the program, according to paperwork filed with the Securities and Exchange Commission Tuesday.

The fairly common practice of boosting commissions to promote sales of a particular fund is known as "full-dealer reallowance." Here's how it works: When you buy shares of a broker-sold fund you typically pay a sales charge, also known as a "load," a portion of which goes to pay your broker's commission. Another portion, typically about 0.5% of the sales amount, goes to the fund company. In a reallowance program, the fund company pays that out to the brokerage with the assumption that part or all will go to the broker.

Reallowance has many critics who say that offering a higher payout can motivate less scrupulous brokers to sell a fund for its higher commission, rather than its suitability. Industry veterans say the practice is simply a way for a fund company to get brokers' attention in an increasingly crowded market. (For more on this practice, see this story from last August.)

The fact that MFS is offering the sales sweetener points to a drastically changed environment for technology funds.

Last year, the average tech fund returned a stunning 135%, according to Lipper. That kind of return drew record investment inflows and a gush of new tech funds.

There are currently 80 tech funds, according to Lipper, including some 25 that have been launched since Jan. 1. (There are probably more than 80, but some aren't included because they are too new or too small.)

But the market's recent volatility has hit tech funds hard, sending some down 30% to 40% over the past month. Even so, investors were still pouring money into the sector in March, to the tune of $11.3 billion. But for the five days ending April 17, investors yanked $630 million out of tech funds, more than they redeemed from any other fund category, according to liquidity tracker TrimTabs.com. (Overall inflows into the sector for April are expected to remain in the black.)

Even for investors who aren't frightened off by the sector's volatility, the $9 million MFS Technology might be a hard sell because of its so-so performance record.

Although officially launched on April 17, 2000, it has actually been around since 1997 as an incubated fund. Incubation is the fund industry's version of the bullpen. Incubated funds are only available to company employees and build a track record with modest assets. Those with good records often launch, and those that struggle fade away. An MFS official didn't immediately return a call for comment.

This fund breaks that rule since it has generally lagged its peers. Last year the fund posted a 63% return, just half of its average peer's return. To be fair, manager David Sette-Ducati isn't responsible for the fund's subpar record since he didn't take the reins until March 1.

Still, it's difficult to say there aren't many better options out there than this wait-and-see proposition. That probably explains the higher payout.

Here's a list of participating brokers:

• U.S. Bancorp Piper Jaffray
  
• HD Vest Investment Securities
  
• First Union Securities
  
• A.G. Edwards
  
• Dain Rauscher Wessels
  
• FSC Securities Corporation
  
• Commonwealth Financial Network
  
• Cadaret Grant & Co.
  
• Nathan & Lewis Securities
  
• JC Bradford
  
• Stifel Nicolaus Brokerage
  
• Centura Securities
  
• Nat City Investments
  
• Cuna Brokerage Services
  
• UVEST Financial Services

>To order reprints of this article, click here: Reprints