Are you planning to invest? Are you hunting for a top-performing mutual fund? Be warned: Your usual source of such information is flawed.
Most investors keep an eye on the mutual-fund performance lists published in newspapers and magazines. Brokers and financial planners have performance data, too.
But most of these lists contain a critical error. They calculate the funds' returns without counting any "load" (upfront sales charge) that you paid to buy them. This makes the load funds look better than they really are. And it masks the good performance of some no-load funds, which levy no upfront charges at all.
Say, for example, that you put $5,000 into each of two funds, one with a 5 percent load, one with no load, and both return 10 percent for the year. The no-load investor would have $5,500; the load investor, only $5,225. The performance list shows them both with the same 10 percent return. But in dollars and cents, the no-load fund comes out ahead.
To show you how loads affect the yield, I asked Bob Edwards of Investability Corp. to put together a special pamphlet for readers of this column. He took 132 growth-and- income funds, both load and no-load, and ranked them according to their performance for the 12 months that ended March 31, adjusted for loads. He also showed after-load performance for three, five and 10 years.
Some interesting facts emerged:
(1) Not counting sales charges, the top three funds would have been load funds, because they showed the highest percentage return. But after deducting the load, those funds dropped to numbers four, eight and nine on the list. The top three positions were taken by no-loads. Before adjusting for loads, 19 of the top 30 growth-and-income funds were load funds, and 11 were no-loads. After the adjustment, those numbers flipped; 19 of the top funds were no-loads, and 11 were load funds.
(2) Despite their demotion, the top load funds do very well. They may move down on the list, but they're still funds you'd be happy to own.
(3) In general, there are more bum load funds than no-loads. Of the bottom 15 funds, 12 are load funds, and only three are no-loads. One possible reason: The stockbrokers and financial planners who sell the load funds can keep a poor one going by explaining to customers that the fund "just had a bad year."
(4) For funds that buy stocks, the effect of the load on relative ranking diminishes over time. After 10 years, 17 load funds make the top-30 list before subtracting the sales charge; adjusting for the charge, 16 are still on the list. So for long-term holders, good stock-owning load funds can still be winners -- even though the sales charge permanently reduces your return.
Bond funds are another story. Load funds so severely diminish their returns that they are almost never worth buying.
Take government securities funds. Before adjusting for sales charges, the funds on the top half of the one-year performance list are pretty evenly divided between load funds and no-loads. But with sales charges subtracted, only 7 percent of the load funds make the top half. All the rest are no-loads. After three years, only 11 percent of the load funds make the top half. After five years, it's still only 17 percent.
So no-loads give bond investors a much better shot -- not only with government securities funds but with municipal bond funds, corporate bond funds and Ginnie Mae funds, too.
To get the growth-and-income-fund performance list, send $1 in cash and a self-addressed, stamped, business-size envelope to Investability Corp., P.O. Box 11162, Chicago, Ill. 60611.
Investability also has a computer disc ($24.95) containing pre- and post-load yields of 2,600 mutual funds, in all investment categories.