The mutual fund industry offers about 8,000 mutual funds, spread among about 24,000 share classes, or about three share classes per fund. But some fund companies offer many, many more share classes, raising the question: When are enough share classes enough?
Multiple share classes are nothing new — they first appeared in 1984 — but the sheer number of share classes at some fund companies is breathtaking.
The American Funds Strategic Bond Fund, for example, has 18 share classes, ranging from the traditional front-loaded A shares through retirement shares numbered 1, 2, 2E, 3, 4, 5, 5E and 6. MFS offers up to 13 share classes. Putnam offers as many as nine.
Why so many? “They're just really good marketing tools,” said David Snowball, publisher of
The Mutual Fund Observer, an internet site.
Consider the American Funds' R classes, which are aimed at retirement plans. Each R class is aimed at different levels of plan assets and administrative. “They allow you as a plan administrator to feel like you're getting something special — say, the R3 class, not those common R2 shares your competitors have,” Mr. Snowball said.
And they allow the fund company to adjust their expenses to different parts of the market. “The American Funds are the most finely tuned asset-gathering and retention operation I can imagine,” Mr. Snowball said.
"Our goal is to keep fees low," said Toni Brown, senior vice president, defined contribution at
Capital Group. "What we want to do is provide flexibility to professional buyers as to how they might divide up costs."
For advisers, American offers traditional front-loaded share classes, C shares, which have no front or back load but a larger 12b-1 fee, and F1 and F2 shares, which are aimed at fee-only advisers. F2 shares don't have a 12b-1 fee. The company has a similar share-class structure for 529 college savings plans.
While the share classes may be difficult for shareholders to sort out, they have a distinct advantage for the funds. For the American funds, “It's a bit like a Moneyball operation,” Mr. Snowball said, referring to the Michael Lewis book on the strategies used by the 2002 Oakland Athletics by manager Billy Beane. “They're not trying to win games by signing the biggest slugger — they're trying to find little things that tilt in their favor by a fraction.”
Ms. Brown puts it this way: “We openly hear requests and needs and consider them carefully,” she said. “If we agree, then we offer that across all funds for appropriate investors.”
Fidelity Investments tends to rebrand its funds according to their target audience, rather than issue multiple share classes. It offers Fidelity Advisor funds for the broker-sold segment, and recently rebranded its Pyramis funds as
Fidelity Institutional Asset Management.
