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B Shares Dominate Fund Industry Sales


The 1990s may be remembered as the decade of the B share when mutual fund historians look at trends in how funds were sold through intermediaries.

B shares - the fund class that imposes a sales charge over several years rather than at the time of purchase - last year for the first time accounted for more than 50 percent of the mutual fund industry's sales in the wholesale channel, according to Financial Research Corp. of Boston, a mutual fund tracking and consulting firm.

B shares represented nearly 57 percent, or about $83 billion, of the net fund sales in the wholesale channel in 1999, according to FRC. The sale of A shares showed net redemptions of roughly 2.2 percent of the $145 billion in net sales in the wholesale channel, according to FRC. Investors pay sales charges at the time of purchase when buying A shares.

FRC discussed the popularity of B shares in a report it made public Feb. 7. The popularity of B shares compared to A shares is likely to continue for the foreseeable future, said Raymond Liberatore, the FRC senior analyst who wrote the report on B shares.

"A shares will continue to erode," Liberatore said.

Traditionally, funds were sold with a front-end sales charge, or load, or without a sales charge. In 1982, the SEC first approved the use of contingent-deferred sales loads under a special exemption to the federal securities laws. Contingent-deferred sales loads allowed broker/dealers to stretch a fund's sales charge over six years or more, rather than requiring investors to pay at the time of purchase.

The SEC, through the late 1980s, gradually made it easier for fund companies to offer two or more classes of the same fund with each class carrying a different distribution charge. In a 1992 report, the SEC noted that some observers had criticized the move away from front-end loads as effectively hiding costs associated with mutual fund purchases. Investors do not appear to have been concerned about the problem.

B shares have risen as a percentage of wholesale funds sold from 8.3 percent in 1990 to 56.9 percent in 1999, according to FRC. The sale of A shares has decreased from 96.3 percent of wholesale fund sales in 1990 to last year's 2.2 percent in net redemptions, according to FRC.

The swing in sales toward B shares is the result of at least two factors, Liberatore said. First, investors are reluctant to pay up-front sales charges when they buy funds, Liberatore said. Indeed, the sales pitch that investors should put all of their money to work immediately appeals to investors, especially in the current bull market, according to fund and broker/dealer executives.

"It's an easier sale," Liberatore said. "There are no fees up front."

The popularity of B shares also is the result of several fund companies' moves in recent years to increase the payments broker/dealers receive for selling B shares, Liberatore said. American Skandia of Shelton, Conn., Delaware Investments of Philadelphia, Federated Investors of Pittsburgh and Liberty Funds Distributor of Boston all have tinkered with the B share concept, according to FRC. In different ways, each company has increased the payout broker/dealers receive on B share sales from the traditional level of four percent with a trailing commission of 0.25 percent, Liberatore said. Those moves have further contributed to the popularity of B shares, he said.

Not all investors have embraced B shares, however. Edward Jones of St. Louis, the broker/dealer, had only about 15 percent of its $13 billion in mutual fund sales for 1999 in B shares, said Tom Miltenberger, principal in charge of mutual fund marketing for Edward Jones. Virtually all of the remaining sales were in A shares, Miltenberger said.

"We are the anomaly," Miltenberger said.

There are several reasons for that. Edward Jones investors have an average holding period of 18 years, Miltenberger said. For long-term investors, A shares cost less, Miltenberger said. Investors' purchases also tend to be high, making them eligible for volume discounts in sales charges - known as breakpoints - that are available for A shares, Miltenberger said. Fund companies rarely provide breakpoints for B shares.

"From our standpoint, the long-term mutual fund investor we think is still best served in A shares," Miltenberger said.

In addition, American Funds of Los Angeles comprise about 40 percent of Edward Jones' fund sales, Miltenberger said. American Funds only recently began offering B shares. American Funds' move will increase the percentage of B share funds that Edward Jones sells, Miltenberger said. Nevertheless, he predicted that B shares still will constitute only 20 percent to 25 percent of Edward Jones sales.