January 2017 IssueLong scroll reading

No Load MFO Ratings

By Charles Boccadoro

We’ve eliminated load from our MFO Ratings methodology, following Morningstar’s lead, effective immediately on our premium site and starting with 4th quarter update on our main site. Previously annualized return calculations included any maximum front load specified in the prospectus, which is what an investor may pay when purchasing shares of a fund, expressed as percentage of the purchase amount.

Morningstar’s Director of Global ETF Research, Ben Johnson, was quoted recently that “fewer investors are paying commissions or sales charges, which is why we’re removing the load adjustment from the calculation. When we established the Morningstar Rating methodology, these charges were much more common and we saw a need to highlight the cost for investors.”

In its press release, Morningstar explains:

Increasingly, Morningstar finds that investors pay for distribution and advice in different ways, but the current calculation only captures the payment for load classes. Incorporating the load into the Morningstar Rating is therefore penalizing load share classes because of choices investors make about how to pay for advice.

Morningstar is removing the load adjustment from the Morningstar Rating calculation to better reflect the current state of the industry. In the United States, approximately half of A share class investors don’t pay the full load, and the Morningstar Rating previously assumed the maximum fee for load investors and the minimum fee for no-load investors.

They also retired so-called load-waived “virtual” share classes.

Loaded funds typically do have a graduated fee scale, something like: 5.75% on amounts up to $25K, 3.5% up to $250K, and 0% above $1M.

MFO discussion board member and beta tester extraordinaire teapot argues “Lots of brokerage firm now offer load waived A shares. I think performance comparison on load mutual fund without load adjustment will be more frequent.”

To his point, nearly half of Fidelity’s 3,621 No Transaction Fee (NTF) fund offerings comprise loaded funds, including those by Templeton, Putnam, Ivy, Cohen & Steers, Calamos, Hotchkins & Wiley, and Principal. Ditto for Schwab’s 3,981 One Source Load Load/No Fee offerings and USAA’s 2,285 No Load/No Fee offerings.

The fine print of such offerings also notes that short-term redemption fees may apply and the brokerage houses may receive other compensation in the form of 12b-1 fees or additional compensation paid by the fund, its investment adviser or an affiliate, as described in the prospectus.

David Swenson, Chief Investment Officer at Yale University since 1985 and author of Unconventional Success: A Fundamental Approach to Personal Investment, has long articulated that the practice of loaded fund is indefensible.

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About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.