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Class A American Fund Nightmare

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My mother is always finding things because she pays attention. And she’s passing that skill along to my kids. After a recent walk, they came back cheering about finding $2. It may as well have been $2,000.

You too may be a person who knows how it pays to pay attention, and if so, you’ve probably taught that lesson to someone you love. Here’s another lesson for you to teach, from a box titled “How the Largest Mutual Funds Did” in The WSJ‘s “Money and Investing” section. The box illustrates how most investors are sold what they own, how little attention they pay to fees, and how a ratings service can be way off base.

The largest stock fund is Growth Fund of America Class A, with $149.3 billion in assets. The fund carries a front-end sales load of 5.75%-which means that your $10,000 becomes $9,425 out of the gate. And a 6.1% return gets you back to square one, or your original $10,000. Not great numbers, especially in a down year. Imagine how new investors felt losing 39.07% in 2008, not including the sales load.

The problem is as clear as day. If a salesman is faced with selling a no-load fund (i.e., one without a commission) versus a loaded fund, which one is he going to choose? Shockingly, Morningstar gives the fund four out of five stars. In fact, 6 of the 10 largest mutual funds are all Class A or front-end-loaded American Funds. What are investors thinking?

Not surprisingly, the other four, offered by Fidelity (custodian for private client accounts at Richard C. Young & Co., Ltd.) and Vanguard, have no front-end sales loads. The seventh-largest stock fund, Vanguard 500 Index Investor Shares, has no front- or back-end loads and has an annual expense ratio of 0.18%. That’s low, and yet Morningstar rates it only three out of five stars. Come on, how does Growth Fund of America get a better rating? Oh, and did I mention that in addition to the 5.75% load, investors in the latter also pay an annual expense ratio?

Through September, investors withdrew $19.3 billion from American Funds while other major firms had inflows. Investors in Growth Fund of America withdrew $334 million in the month of September alone. Obviously, they are catching on. Unfortunately the front-end loads probably are not being returned. This was an expensive lesson for those investors, and one that could have been avoided. And if you’re short on time, working with someone who pays attention for you is always the best place to start.

E.J. Smith is Managing Director of Richard C. Young & Co., Ltd. an investment advisory firm managing portfolios for investors with over $1,000,000 in investable assets

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.