In an effort to ward market timers from an aggressive growth fund, American Century Investments will give only stock to investors who cash out of the product without first giving 15-days notice.
The American Century Avanti Fund won't be available to investors until at least early next year, said Chris Doyle, a spokesman for the firm. But the fund is already drawing attention because of American Century's unique approach to keeping market timers away from the product and the firm's insistence that investors stick with the product for at least five years.
"Clearly this fund will not be for everyone," Doyle said. "We're telling investors up-front, if they're not willing to make a long-term commitment to this portfolio, they should not invest in the fund."
The product will be managed by James Stowers and John Small. It will employ what American Century calls a "systematic, highly automated approach," according to an SEC document filed Jan. 19 and amended on Friday. That approach "assumes that stocks of companies with accelerating earnings and revenues will, over time, provide the greatest investment returns," the filing reads. "At times the market may not behave in accordance with this assumption. The fund's performance will suffer during those times."
The product requires a $10,000 minimum investment, but investors can contribute as little as $100 each month, paying a $15 quarterly fee, until their accounts reach the minimum, the filing said.
In a nutshell, investors must tell the company 15 days before they redeem their funds that they plan to do so. Otherwise, they will receive stock from the Avanti portfolio. "That 15 days will scare market timers away," Doyle said. "If you're a buy-and-hold investor and you're going to give it 10 years, 15 days is not going to mean anything to you. The idea is to attract an investor with a different mindset."
The approach has been tried by a handful of fund companies, Doyle said, because those who ride mutual fund performance above their initial investments and then cash out after short time periods, typically disrupt portfolio management strategies, spark higher expenses to investors and, en masse, can force managers to unload stocks in order handle redemptions.
Doyle said the company had considered simply charging redemption fees to thwart market timing, but decided "we didn't need a redemption fee as long as we had the in-kind redemption fee feature."
In addition, investors will have to pay a 5% sales charge if they redeem their assets within five years of their initial investment, according to the filing. Doyle said that charge will be used to reimburse distributors for investor-education efforts associated with the fund.
American Century has gone to lengths to make it clear that this matrix of unusual rules is unique to the Avanti fund. The product is branded separately from the company's 75 other portfolios and Doyle says American Century has no immediate plans to expand the rules to its other funds.
"This is a niche product," he said, "an experimental fund."