 # Fund Fee Structure Problem

This might be a simple question - just can’t remember exactly how… Assume expected annual return is 8% for the following funds. Class B Shares Front end load: None Back end load: Initially 5% of sale proceeds - declined by 1% each year Total annual fee: 1.5% Class C Shares Front end load: 0.5% of investment Back end load: 2% during the first year Total annual fee: 2.0% What’s HPR for each class over 4-yr period? Which one is a better choice? How to handle the back-end fee here, especially for class B? Thx.

Think of this in terms of the return which accounts for the annual expenses and one off expenses: Class B shares: (1.08 - 0.015) ^ 4 - (0.05 - 3*0.01) Annual - annual no years - one-off expenese return expense HPR = 26.6% Class C shares (1.08 - 0.02) ^ 4 - 0.02 - 0.005 HPR = 23.7%

d11j0d Wrote: ------------------------------------------------------- > Think of this in terms of the return which > accounts for the annual expenses and one off > expenses: > > Class B shares: > > (1.08 - 0.015) ^ 4 - > (0.05 - 3*0.01) > Annual - annual no years - one-off > expenese > return expense > > HPR = 26.6% > > Class C shares > > (1.08 - 0.02) ^ 4 - 0.02 - 0.005 > > HPR = 23.7% Thanks, d11j0d. Somehow the answer shows: Class B HRP = (1+%8)^4 x (1-%1.5%)^4 x (1-%1) - 1% Class C HRP: = (1-0.5%) x (1+%8)^4 x (1-%2)^4 - 1% Not sure why deduct 1% in the end for both classes? I still think the back-end load is handled somewhat differently than regular fees. Any insights here?

it comes from the holding period return. The HPR is (final value - initial value) / initial value In this case you are looking at the return of an initial investment of 1 dollar, it represents the initial value. The initial value is 1 in the denominator as well, but they don’t need to show that. Remember, holding period return is a DIFFERENCE in final value to initial value. Without the -1, you just calculated the final value of the compounding net of fees, not the difference between the final value and the initial investment.

TheAliMan Wrote: ------------------------------------------------------- > it comes from the holding period return. > > The HPR is (final value - initial value) / initial > value > > > In this case you are looking at the return of an > initial investment of 1 dollar, it represents the > initial value. The initial value is 1 in the > denominator as well, but they don’t need to show > that. > > Remember, holding period return is a DIFFERENCE in > final value to initial value. Without the -1, you > just calculated the final value of the compounding > net of fees, not the difference between the final > value and the initial investment. Ok, TheAliMan. Well done to explain HPR. Now how to deal with back-end load fee? It’s not calculated as part of the total annual fee though…

Correct, the back-end fee is not calculated as an annual fee, it’s calculated when you sell. Class B HRP = (1+%8)^4 x (1-%1.5%)^4 x (1-%1) - 1% Here, you have a holding period of 4 years. The back-end fee is calculated by (1-1%) The question states that back-end load is initially 5% declining by 1% each year. Four years pass leaving you only 5-4% = 1% of back-end load remaining to be calculated on your total position. So, four years equates to 1% back-end fee remaining For Class B, Class C HRP: = (1-0.5%) x (1+%8)^4 x (1-%2)^4 - 1% Since more than 1 year has passed, there is no back-end load.

right, because the back end load is only deducted at the end when sold. so you calculate the initial investment with the expected return. deduct the annual expenses and then at the end take that sum and apply the backend load of 1%.

I see. Thx both TheAliMan & jut111 to refresh my memory. So back-end fee will apply only at the time to sell the investment.

correct, think of it as a redemption fee

Why are we subtracting instead of calculating the compound value? Example if final return is 1.25 and backend is 1%, isn’t our final final return 1.25 * .99, not 1.25 - .01?

Thanks for that. I thought the backend load would be 2%… i.e. 5% (first year), 4% (second year), 3% (third year), 2% (fourth year). Do you think the 5% charge drops to 4% immediately, I would have thought you would need to wait a full year for it to fall