Question

4. The Equity fund sells Class A shares with a front end load of 4% and class B shares With 126-1 fees of .5% annually (at end of year) as well as backend load fees that start at 5% and Fall By 1% for each year the investor holds the portfolio (until the fifth year). Assume the rate of return on the fund portfolio net of operating expenses is 10% annually. What is the value of a $10,000 investment in class A and Class B shares if the shares are sold after (a) 1 year, (b) 4 years, (c) 10 years? Which fee structure provides higher net proceeds at the end of each investment horizon?

Answer 1

Initial investment in class A shares after netting front end load = $10,000 * (1 - 4%) = $10,000 * 0.96 = $9,600.
The Class B shares have no front-end load. However, the net return to the investor after 12b-1 fees will be only 9.5%

Value of investment after 1 year:

Class A shares = 9,600 * (1 + 10%) = $10,560

Class B shares = $10,000 * (1.095) * (1 - 0.04)=$10,512.

Class A shares are better choice.

Value of investment after 4 year:

Class A shares = 9,600 * (1 + 10%)^4 = $14,055.36

Class B shares = $10,000 * (1.095)^4 * (1 - 0.01)= $14,232.84

Class B shares are better choice.

Value of investment after 10 year:

Class A shares = 9,600 * (1 + 10%)^10 = $24,899.93

Class B shares = $10,000 * (1.095)^10 = $24,782.28

Class A shares are better choice.