March 13 was a red letter day for The Payson Funds. The $18 million Payson Balanced Fund and its sibling, the $16 million Payson Value Fund officially became no-load products, shedding their long-standing 4% front-end sales charge as of that date.
Both funds are managed by H.M. Payson, an investment adviser headquartered in Portland, Me. Payson manages a collective $2 billion in assets, predominantly in separate accounts.
What prompted the conversion? The decision to drop the sales charge was more of a formality than a significant change of heart, said Peter Robbins, managing director of the firm.
While the funds maintained the right to impose the full 4% sales front-end charge on purchases, it never did, he said. "Not one share was sold with a load," Robbins said. Most of the assets of the two funds belong to Payson employees and clients that hadn't met the $250,000 minimum investment to qualify for separately managed accounts.
Both the balanced fund, which was created in late 1991, and the value fund, which was created in July of 1992, were launched with the 4% sales charge in place. But the fund adviser realized that it would never really be competing with the big name fund groups like Kemper, Putnam and Fidelity, Robbins said.
Although the fund group absent-mindedly tagged on the funds' sales load from the start, Payson never really expected to capture the assets of investors working with brokers. "The kind of mutual fund shareholder we want to attract really knows that a sales charge doesn't make economic sense," Robbins said.
Nor was Payson's recent decision to drop the sales charge made to challenge the escalating trend within the fund industry that has former no-load funds, such as Dreyfus Founders, Scudder Kemper, Credit Suisse Warburg Pincus, and INVESCO, adding sales charges and scrambling into the world of intermediary-sold financial services, Robbins said.
"We're looking for the kind of mutual fund investor who wants to buy a mutual fund, not be sold a fund."
He also doesn't think the funds will capture the attention of other registered investment advisers and financial planners, an audience which no-load funds have increasingly been catering to, simply because most would view Payson as a direct competitor for investment clients, Robbins said. Rather, the fund group has set its sights on playing up its local appeal and its winning performance, which just gained a 4% boost.
Pumping Performance, Assets
Payson is not the only fund group to buck the trend and consciously dump or significantly reduce its sales charge. But the motivation for such a move differs from fund group to fund group.
In July of 2001, The Perkins Discovery Fund and The Perkins Opportunity Fund, both managed by Perkins Capital Management of Wayzata, Minn., similarly dropped their 4.75% front-end sales charge and went no-load, slashing their 12b-1 fee in half in the process. Perkins' goal was to pump up fund assets.
But according to Morningstar, results have been mixed. The Perkins Opportunity Fund, which had $31 million in assets in August, has now shrunk to $28 million in its coffers as of March 19. The Perkins Discovery Fund, which counted only $1 million in assets last summer, has seen assets balloon to $4 million. Perhaps more importantly, both funds have seen an immediate boost to their performance numbers, which are no longer dragged down by the sales charge.
Slashing the front-end sales charge was the performance-enhancing technique used by the Golden Rainbow Fund, one of the James Advantage Funds advised by James Investment Research of Alpha, Ohio. Three other funds in the group maintain their 5.75% front-end sales charge.
But to beef up the lagging performance on the Golden Rainbow Fund, the adviser cut the then $82 million fund's front-end sales commission to 2% from 5.75% in October of 2000.
For the full year 2001, that sales charge reduction helped the fund's return stay in the black instead of falling into negative territory. Last year the fund returned 2.56% which, after accounting for the greatly reduced 2% sales charge deduction, left investors with a slimmer 0.49% return.
Still, the Golden Rainbow Fund's enhanced performance hasn't helped it attract big bucks. The fund's assets have fallen to a current $65 million according to Morningstar.
Morningstar says that 1,423 mutual funds have reduced or eliminated their loads at some point. That is roughly 10% of all open-end funds.
Among all equity funds, load funds still reign supreme, accounting for 83% of all portfolios, according to Lipper. Within the overall mutual fund universe, there are now an overwhelming 8,511 funds that carry some type of sales charge, versus only 1,747 no-load funds.
Lipper data show that load funds attracted more dollars than no-loads funds in 2001. Among equity funds, load funds as a group had net inflows of $35.5 billion last year, versus the $1.9 billion in net outflows posted by no-load funds. The heyday of no-load funds capturing the majority of new money is likely over, fueled in part by unrepeatable performance and the death of point-and-click investing via the Internet, said Don Cassidy, senior fund analyst with Lipper.