InvestmentNews Editorials

Number of mutual fund share classes boggles the mind

Meanwhile, the industry's biggest threat, ETFs, are chugging along offering a single-version product to all investors

Apr 10, 2016 @ 12:01 am

As investing becomes more complex, one might assume that the mutual fund industry, representing one of the most user-friendly investment products ever created, would strive to keep it simple.

But judging by its innovative use of multiple share classes, the fund industry, it seems, has opted to boggle investors' minds.

As detailed last week by InvestmentNews senior columnist John Waggoner, the fund industry has turned a universe of about 8,000 mutual funds into an alpha-numeric brainteaser of more than 24,000 funds.

Some firms are still sticking to the basics of A, B, C, and I shares, representing various retail load structures and the volume-discounted institutional share class.

But you also have the extremes of fund families like American Funds, touting up to 18 different share classes, for reasons that are not easily understood.


American Funds, like most fund companies adopting the kitchen-sink approach to share-class creation, will argue that the various share classes are designed with professional financial advisers, and not the retail investor, in mind. But it's difficult to imagine most advisers relishing the idea of becoming fluent in American Funds' eight different classes of retirement shares for the same mutual fund.

Making matters worse, the fund companies aren't even on the same page in terms of what many of the more imaginative share classes represent.

Critics charge that the fund companies are just making subtle tweaks to create a new share of the same fund in order to appeal to some new investor subgroup.

For advisers and investors, more share classes mean more due diligence and potentially drawing attention to some of the extreme variations among classes of the same fund.

Consider the simple example of the AB Core Opportunities Fund (ADGCX), the C-share version of a $169 million fund with nine share classes.


The C share has a 1% level sales load and a 1.9% expense ratio, including a 1% 12b-1 fee.

On the other end of the spectrum is the Z share (ADGZX), which comes with no sales load, no 12b-1 fee and an expense ratio of 85 basis points.

After fees and expenses, the C share is down 77 basis points so far this year, and up 1.34% over the past 12 months.

The Z share is down 49 basis points this year, and up 2.44% over the past 12 months.

Meanwhile, the mutual fund industry's biggest threat, exchange-traded funds, is chugging along offering a single-version product to all investors.

Advantage ETFs.


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