Level-load mutual fund shares are gaining popularity among mutual fund executives and investors.
Fund executives and brokers see the shares as a way to offer investors another pricing alternative to the more traditional front-end and back-end sales charges.
They also offer a means of combatting the growing popularity of no-load mutual funds by offering short-term investors the ability to gain the advice of a broker or financial planner for a modest fee.
'Becoming More Price Sensitive'
"Going forward, the mutual fund companies who will survive are the ones who will provide this pricing structure for clients," said Gary DeMoss, senior vice president and national marketing manager at Van Kampen Merritt. His firm began offering level-load shares on all of its mutual funds in early March.
"There are certain things I believe you've got to have, and this is one of them," Mr. DeMoss said. "Clients are becoming more price sensitive."
Mutual fund companies that traditionally assess sales charges need the option of level-loads "to compete against the no-loads and to meet the real needs of an investor," Mr. DeMoss said.
Uniform Sales Charge
As the name implies, level-load shares assess a uniform sales charge, usually in the range of about 1% of the total assets invested. The charge is assessed annually for the life of the investment.
Mutual fund executives are quick to point out that the level load pricing structure seems most ideally suited for short-term investors.
While investors in level-load funds can forgo heftier front-end or back-end sales fees, a caveat is that for clients with an investment horizon of more than seven to 10 years, costs will exceed those on a front-end load fund, for example. Also, the total return could be lower, said Bob Dow, a partner at Lord Abbett & Co. in New York.
Tax-Exempt Funds Join In
Instead of adding level-load shares to the front-end loads available on its oldest mutual funds, Lord Abbett has introduced a new line of Counsel mutual funds that replicate existing funds but offer only level-load shares.
Level-loads were first offered on equity and taxable mutual funds. However, within the past few months, more tax-exempt funds are jumping on the bandwagon.
Tax-exempt level-load mutual funds began proliferating during the fourth quarter of 1993, according to Lipper Analytical Services.
As of March 31, more than 100 funds had over $2 billion of assets in those shares, Lipper figures show.
J&W Seligman & Co. began offering level-load shares for its equity funds last May and rolled out the shares on its tax-exempt funds in February. The shares now account for about one-third of mutual fund sales.
Kemper Mutual Funds is seeking shareholder approval to combine its two mutual fund families into one offering level-load shares.
"The basic reason we're doing it is to offer investors more choice," said Bill Chapman, executive vice president of marketing at Kemper Financial Services Inc.
Massachusetts Financial Services began offering level-load mutual fund shares for about a dozen of its mutual funds in January, a spokesman said.
Nuveen Weighing a Move
The level-load shares were requested by people who aren't long-term investors, the spokesman said.
Currently, slightly more than $16 million is invested in those tax-exempt level-load shares.
At John Nuveen & Co., which is now examing its mutual funds and their structure, the idea of offering level-load shares is under consideration, according to a spokesman.
Any decision about whether to offer the shares would not be made before the fall at the earliest, the Nuveen spokesman said.
Nuveen has $31.3 billion of tax-exempt assets under management, in both open-end and closed-end funds.
"What we're trying to do is give you as many arrows in the quiver [as you need] to meet your investment objectives," said Joe Grano, president of retail sales and marketing at Paine Webber Inc.
Investment Counsel Included
Mr. Grano said that instead of a sales charge such as a front-end load or a back-end load, investors are assessed a level load of 1% each year. For that price, investors gain investment counsel from a financial adviser or broker -- a service not available to purchasers of no-load funds.
Since brokers do not receive a commission when clients buy a front-end fund or exit a back-end, they may be more willing to provide good investment advice to ensure that clients reach their investment goals and remain invested, some proponents argue.
"It's an alternative we believe is palatable," Mr. Grano said. "For most people, the level-load is probably a better deal. But if not, we have other structures."
PaineWebber in Early
PaineWebber, which began discussing the concept of level-loads with the Securities and Exchange Commission in 1990, may have been one of the first firms to offer the class of shares in its mutual funds. The firm began offering level-load fund shares in 1992 and now manages about $2 billion of such shares.
The level-load removes the incentive for redemptions, Mr. Grano said. A reduction in redemptions can also aid a mutual fund's performance because it may help to stabilize a fund's net asset value.
In addition, a higher percentage of a client's investment is being put to work, Mr. Grano said.
For example, when investors purchase a mutual fund with a 6% front-end load, only 94 cents of each dollar invested initially goes to work. However, if investors buy a level-load fund, with a 1% fee, then 99 cents of each dollar goes to work for them, Mr. Grano said.
Way to Attract Investors
Alliance Capital Management believes that the addition of level-load shares has helped it attract new investors, said Kevin T. Cannon, a vice president in the firm's financial analysis area. Since the company added level-load shares last May, no investors have switched from existing front-end or back-end load holdings, Mr. Cannon said.
In addition, approximately 50% of the level-load buyers eventually purchased other Alliance products, he said.
Another plus for Alliance was that in 1993, level-load investors tended to be more affluent. They invested three times as much as traditional front-end and back-end fund purchasers. Alliance manages about $2 billion of level-load shares. Approximately $1 billion of that is in municipals.