Lecture 3 Flashcards
1
Q
Front-end loads
A
- Paid at purchase
- Compensation for the brokers’ and financial advisers efforts to make investors purchase the fund
- Regulation allows for front-end loads of up to 8.5%
- Actual fees are lower and depend on the amount that is invested in the fund
2
Q
Deferred load
A
- Paid when redeeming the fund’s shares
- Amount may depend on how long the shares are held by investors
- Deferred loads are usually higher than front-end loads
- Deferred load is less salient to investors
- Deter investors from frequent trading
3
Q
Redemption fees
A
- Similar to deferred load but money is not paid to brokers
- Paid to fund to cover costs occurred due to the redemption
- Limited to a maximum of 2%
4
Q
Total expense ratio (TER)
A
- Comprises the fund’s operating expenses
* TER = dollar expenses / average daily NAV
5
Q
Management fee
A
- Compensation for the investment adviser
- To be negotiated/approved by the board members
- Very few funds have incentive fees
6
Q
Other expenses - included in TER
A
- Custodian fee: Keeping the fund’s assets safeguarded
- Transfer agent fee
- Accounting expenses
- Legal fee
- Auditor fee
- Independent director fee
7
Q
12b-1 fees
A
- Fee paid by current shareholders for the fund’s marketing and distribution
- Objective: Enhance fund growth to lower expenses on a per share basis by exploiting economies of scale
8
Q
12b-1 fee problems
A
- Conflict of interest: Shareholders pay for increasing the fund adviser’s income
- A significant proportion of 12b-1 fees are used to pay the financial adviser -> past marketing efforts
- Sticky: Questionable whether the potential reduction in the other expense components outweighs the 12b-1 expenses
9
Q
Other expenses - not included in TER
A
- Fund switching costs
- Account maintenance fee: Fixed fee if the invested amount is below a threshold
- Explicit trading costs: broker fees
- Implicit trading costs: bid-ask spread
10
Q
Class A shares
A
- Front-end load (often around 5%)
- Low annual expenses, 12b-1 fee between 0 and 0.5%
- no deferred load
- low minimum investment (often less than $2,500)
11
Q
Class B shares
A
- Deferred load (typically for 5 years)
- Average annual expenses, 12b-1 fee between 0.75% and 1.0%
- No front-end load
- Low minimum investment (often less than $2,500)
- Typically convert to class A shares after five or more years
12
Q
Class C shares
A
- “Level load”: Annual load of 1.0%
- High annual expenses, 12b-1 fee between 0.75% and 1.0%
- No front-end load and no deferred load
- Low minimum investment (often less than 2,500$)
13
Q
Class M shares
A
Similar to class A shares but • Lower front-end load (up to 3.5%) • Low annual expenses, 12b-1 fee sometimes zero and sometimes between 0.25% and 1.0% • No deferred load • Larger minimum investment required
14
Q
Institutional shares
A
- Overall investment of at least $1,000,000 required
- Lowest annual expenses, no 12b-1 fees
- No front-end load and no deferred load
- Minimum investment typically $25,000
