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Too Heavy a Load

Michael Perry, 1:14 pm ET

I’M A MORNINGSTAR subscriber. I find that the site provides investing and personal finance information that’s sensible and useful for the average person, and that it promotes good investing and planning behaviors. Still, I was taken aback by a recent article, which discussed four funds that investors have been buying.

In terms of deciding what I buy, I don’t really care what others have been purchasing. Still, it’s interesting to see, so I checked it out. My surprise: Three of the four funds mentioned are A share funds, which means buyers have to pay a front-end commission, or load.

For instance, one of the funds is Columbia Dividend Income, a Morningstar medalist that “really emphasizes quality” and “has put in some nice defensive qualities,” according to the Morningstar analyst.

That sounds good. But not mentioned in the article is that, for regular retail investors, the Columbia fund’s A shares have a 5.75% front-end load. You can avoid that sales commission—but only if, say, you buy through an advisory account, which will then charge you a fee, or it’s offered in your 401(k). As of May 31, the front-end load A shares held $4.2 billon, second only to one of the institutional share classes.

Besides my surprise that Morningstar has given a silver rating to a front-end load fund, I’m also surprised that investors have apparently been piling into it, such that the fund’s about to close. I realize not everyone has gotten the message from HumbleDollar and elsewhere that costs matter, but Morningstar usually promotes the concept.

It’s one thing to pay an above-average expense ratio. But to me, a front-end load is something else entirely, because it can take years to recoup that cost—and it may never happen. Maybe that’s my own mental accounting at work, and a cost is a cost. Still, I won’t be bothering to do any math. Paying a load is a deal breaker for me.

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Richard L
Richard L
8 months ago

Paying a load is a deal breaker for me as well.
Some brokerage firms waive loads for the A shares of select funds.
For example, three funds (PONAX, LBSAX, CVSIX) mentioned in the Morningstar article are available load-waived with no transaction fee (NTF) via Fidelity.

Last edited 8 months ago by Richard L
An
An
8 months ago

Funds with a 5.75% front load requires a 6.1% return to get back to where you started. It’s like you gave them your money to hold for 1 year before investing it – assuming an up market.

Andrew Forsythe
Andrew Forsythe
8 months ago

I absolutely agree. Many decades ago when I was very young and very naive, a broker advised me to buy some American Funds with a similar 5.75% front load. The funds did well over time, and Capital Group is a good shop, but I’ve never forgotten that huge load. But at least it was a good lesson—that’s the first and last time I’ve ever paid one.

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