When investing in socially conscious funds, does it make sense to pay a load fee?
QUESTION: During my 20s, when I first started investing, I bought Class A shares of some of Calvert's socially responsible funds through a broker. I have continued to invest in these funds, and all of my taxable investments as well as my IRA (and my husband's) are with Calvert.
I've been relatively content with Calvert. But I haven't been that happy with my broker, who recently moved out of the country. Also, I don't like the idea of paying a front-end load fee. Unfortunately, Calvert doesn't offer a no-load share class.
Should I switch brokers and continue to invest in A-shares at Calvert? Or is there a smarter way to invest my money?
ANSWER: We at SmartMoney.com rarely recommend mutual funds that carry a load. Why pay a fee if you don't have to? With nearly 3,000 no-load funds to choose from, according to fund-tracker Lipper, we believe there are usually at least a few good no-load fund options in each investment category.
That doesn't mean you should never pay a front-end load, which typically ranges from 3% to 5.75% of your investment. "Commissions aren't bad if what you're getting is valuable advice," says Harold Evensky, a fee-only Certified Financial Planner (CFP) with Coral Gables, Fla.-based Evensky & Katz. "Unfortunately, often the advice isn't all that valuable."
Of course, even if you're ready to head down the path of no-load investing, that doesn't mean it's time to sell your existing shares. Instead, take a good look at your funds' performance. "If the funds you have are doing well against their respective peer groups, social or otherwise, why move?" says Don Cassidy, senior research analyst at Lipper. And, when investing via a taxable account, one should always consider the potential tax hit before selling.
Future investments, however, are a different story. We believe it's always worthwhile to see if there's a good no-load fund available before buying one with a load. Investors can research socially responsible investing (SRI) funds at Web sites like socialinvest.org and socialfunds.com.
Should you decide to continue investing with Calvert, keep in mind that the fund family offers breakpoints on its loads for those who invest certain amounts in the fund family as a whole. For example, Calvert will lower its front-load charge by up to one percentage point when an investor's total assets in Calvert funds exceed $50,000.
But while the fund family is one of the biggest SRI fund families around, giving investors a good range of investment options, not all of its funds are superstars. Morningstar fund analyst Greg Carlson says that "some of (Calvert's funds) have been pretty solid, (but) others have had more mixed results," a situation he attributes to Calvert's higher fees. Within the Calvert fund family, Carlson recommends the Calvert Social Investment Equity fund (CSIEX) and the Calvert Social Investment Balanced fund (CSIFX) because of their good management and relatively low fees (the funds have 4.75% front loads and expense ratios of 1.25%).
Also, investors considering investing in the Calvert Social Index fund (CSXAX) might want to take a look at the no-load Vanguard Calvert Social Index (VCSIX), Evensky recommends. The two funds track the same index, but with an expense ratio of 0.25%, Vanguard's version comes at a much lower price. (In addition to the 4.75% front load, Calvert has an expense ratio of 0.77% annually).
As always, when shopping for a new fund for your portfolio, be sure to keep an eye on your portfolio's asset allocation. People who invest purely in SRI funds sometimes struggle to maintain the right balance of investment types. "It's not easy to build a good or complete portfolio (with SRI funds only)," says Cassidy.
Remember, most portfolios need a mixture of equities and fixed income. The equity portion of the portfolio should then be further diversified in terms of market cap and domestic vs. international holdings.