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Rear-load holders may ride out correction, some say Mutual funds


For the last couple of years, as investors threw hundreds of billions into stock mutual funds, many bought shares with "rear loads" from their brokers because they didn't want to reduce their investment by paying upfront commissions.

Now, as many worry that a correction is overdue in the still-booming bull market, there are some who believe that investors holding rear-load shares, also called "B" shares, might be more likely to ride it out than those who paid upfront commissions.

"A" shares are the same portfolio of securities but the commission is paid as a front load, reducing your investment by the amount of commission paid at purchase. A $10,000 investment with a 5 percent commission would put only $9,500 to work for you.

With B shares, known also as contingent-deferred sales-charge shares, there is no upfront commission so the entire $10,000 is invested right away. But if you withdraw the money within a specified period, you pay an exit fee, based not only on your

initial investment but also on any earnings.

That commission often runs 6 percent if you withdraw in the first year, 5 percent in the second, then 1 percentage point less in each subsequent year. This structure acts as an incentive for people to stay in the funds.

"Some of the data indicates that after the [1987] crash, B-share ++ retention was pretty good," said Jessica Bibliowicz, executive vice president in charge of Smith Barney Mutual Funds. "It

seems that investors didn't want to pay a commission on top of losing money, and they stick around. It is a source of discipline."

Bibliowicz said B shares, which account for about 10 percent of all mutual fund money, have become the predominant form of investment for many portfolios primarily because "investors don't want to pay upfront commissions. They want to see all their money go to work."

Joseph Clinard, a broker and financial planner in Melville, N.Y., and a partner in North Shore Capital Corp., said he urges clients to buy B shares for precisely that reason.

"Psychologically, people don't want to see their money reduced by sales charges before they invest," he said. "And, the B share money is there to stay and it is for longer terms."

That might be one reason. But Louis Harvey, president of Dalbar Inc., a Boston publisher that conducts mutual fund industry studies, said a survey on why people with B shares stayed in bond funds longer than those who held A shares during the 1994 bond fund debacle found that "the broker, not the investor, was the driver. It is really up to the broker to advise an investor to stay in. I don't know that being in B shares and facing a commission was a deterrent to getting out.

"The conclusion we came to," Harvey said, "was that it seemed to be the broker's mind-set. Those who sold A shares seemed to have more of a trading mentality. Those who sold B shares sold them to investors who were more conservative and they held them longer."

The difference for investors between A shares and B shares works this way: If you have $10,000 to invest and you buy a front-load fund with a 5 percent commission, you will invest only $9,500. If, in 1995, that fund grew 22 percent, and then another 19 percent last year, that $9,500 would have grown to $13,792, a $4,292 gain. But $10,000 in B shares, fully invested, would be worth $14,518, a gain of $4,518.

However, if you had decided to clear out at the end of 1996 because you felt the market was going south, you would have paid a 5 percent commission on the B shares, which would be $726, not the $500 charged as the front-end commission. That is because the commission is based on the value of all your assets, including investment gains. So the commission is based on the whole $14,518, not just the $10,000.

How much would you end up with? Excluding the fund's expenses, you'd have $13,792, the same as with the front-load. But you'd probably have paid more in expenses, too, since the 12b-1 marketing fee for B shares is about a half-percentage point higher than for A shares. So there is a price to pay for the privilege of not paying an upfront load.

Still, Clinard, who said he has been through five bear markets in his career and expects a correction eventually, is not worried about a downturn.

"The market always goes up again, doesn't it?" he said. Besides, he pointed out, as did Bibliowicz, there is a way around the rear-end commission for B shareholders who decide to get out of equities: Transfer the money into the same fund company's money market or bond funds and there is no commission, because it is an exchange, not a redemption.

Keep in mind, however, that exchanges from fund to fund still involve a sale, which means you will owe tax on any profits. Consider it Uncle Sam's rear-end commission.

Born of merger

One plus one equals either one, or three: Twentieth Century Funds and the Benham Group merged, creating American Century Investments. But, out of the two large companies, they have created three fund groups to manage the assets and differentiate among them.

The Benham Group gets the money market and bond funds; Twentieth Century Group has growth, aggressive growth and international funds, and the new American Century Group gets the balanced, asset allocation, specialty and conservative equity funds. Benham will have 40 funds totaling more than $11 billion under management; American Century, 12 funds with $6.3 billion; and Twentieth Century, eight funds with $32.5 billion.

For the moment, Twentieth Century Funds keep this century's name.

Along the same line, American Express Financial Advisors has put its name on the IDS mutual fund group that it owns. So if you suddenly think your IDS funds have disappeared, just look under American Express.

Pub Date: 2/02/97

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