The best-known holdout against mutual fund B shares - Capital Research and Management Co. of Los Angeles - is taking steps which would make it possible for the group's American Funds to add that increasingly popular sales charge option.
Capital Research's $54 billion Investment Company of America fund will ask shareholders at a meeting October 19 to approve changes in its legal structure that would permit it to add back-end-load, or B shares. Capital Research executives may recommend adding the shares in the future, according to a preliminary proxy statement which the firm filed with the SEC on July 19.
Adding B shares would make Capital Research, the third-largest fund company behind Fidelity Investments of Boston and the Vanguard Group of Malvern, Pa., an even more formidable competitor than it already is, mutual fund consultants and industry observers said. The firm's American Funds have a loyal following among intermediaries at wirehouses, regional broker/dealers and banks.
Capital Research had approximately $281 billion in assets under management as of June 30, according to Lipper of Summit, N.J., the fund tracking firm. The 65-year-old Investment Company of America is the fourth largest fund in the industry, according to Lipper.
The Investment Company of America proposal is part of a systematic effort by Capital Research to make it possible for its funds to add B shares, said Chuck Freadhoff, a Capital Research spokesperson. Despite those efforts, Capital Research has not decided to recommend the pricing option for any fund, Freadhoff said. Funds' boards of directors must vote to approve adding B shares, according to the proxy statement.
Currently 22 of Capital Research's 29 funds have the option of adding B shares, Freadhoff said. Capital Research plans to seek permission from shareholders to permit B shares for each fund in the American Funds family, he said. There is no deadline by which Capital Research expects to complete that effort, Freadhoff said.
Capital Research is the last of the wholesale, or intermediary-sold, fund groups to use only A shares for mutual fund distribution, mutual fund consultants said. A shares require investors to pay their sales charges when purchasing their funds. B shares permit shareholders to spread the sales charge and expenses associated with it over a period of time, usually about seven years.
Capital Research has been able to build substantial assets without the B-share pricing. It is the largest wholesale firm, according to Financial Research Corp. of Boston, the fund tracking and consulting firm.
Adding B shares could enable Capital Research to expand distribution even further, consultants said. The use of A shares has declined from 85 percent of all wholesale fund assets in 1990 to approximately 67 percent as of year-end 1998, FRC said in a February report. The use of A shares will taper off in the coming years as B shares continue to grow in popularity with intermediaries, FRC said.
The broker/dealers that sell American Funds have asked Capital Research to offer B shares, Freadhoff said. The firm is not yet convinced that B shares are as good investment alternatives for shareholders as A shares, he said.
"We have always felt that A shares were the best long-term investment for investors," Freadhoff said.
Indeed, in its proxy statement, Capital Research said back-end load shares normally have higher expenses than A shares. Intermediaries and regulators also say that long-term investors tend to pay less in expenses and sales charges by purchasing A shares.
The adoption of B shares is only one of several trends in the industry that Capital Research has eschewed. The firm historically has shunned the publicity many firms seek to build their brand identity. Capital Research also rarely adds new funds, a common industry practice that frequently attracts new assets. When Capital Research introduced the New World fund in April, it marked the group's first new fund since 1994. And until last year, Capital Research refused to make ongoing revenue sharing payments to intermediaries for fund sales, a common and longstanding industry practice for wholesale fund groups.
"They're almost as well known for what they haven't done as [for what] they have done," said Andrew Guillette, a consultant at Cerulli Associates of Boston, a mutual fund consulting firm.
Capital Research ultimately may find that it must add B shares for competitive reasons, Guillette said.