If you've ever tried to buy a mutual fund, for your clients or yourself, you've probably spent some time trying to figure out which share class of the fund to buy. For each of the funds they offer, many fund companies offer multiple share classes, or "series" as they are also known.
Each of these series is intended for a different kind of investor. For example RBC offers an Advisor series for funds sold through financial advisors, and also a D series sold through discount brokers. The holdings of these funds are the same, but there could be differences in the fees charged, purchase options and minimum investments, among other things.
Larger fund companies, like RBC, offer a plethora of share classes -- sometimes numbering more than 25. This wouldn't be so bad if there was some consistency in the monikers fund companies used to identify share classes; sadly this isn't the case. So while RBC uses D to identify series sold through discount brokers, another fund company may use A, J, Y or whatever else it feels like calling it. You can try to read the prospectuses to figure out the differences, but that will probably leave you scratching your head too.
To help investors navigate this alphabet soup, the Canadian Investment Funds Standards Committee (CIFSC) has devised a way to categorize these share classes. The CIFSC is a collection of Canada's major mutual fund database providers and research firms, including Morningstar, with a mandate to standardize classifications for Canadian-domiciled mutual funds. One of its major roles is to classify funds into asset class categories like Canadian Equity, Global Neutral Balanced, High Yield Fixed Income and so on. Now the CIFSC is taking a similar initiative for the various share classes.
According to the CIFSC's definitions, each share class will fall into one of four buckets:
- Commission-based advice: these are share classes that investors purchase through the help of an advisor. The management fees for these share classes include compensation for the advisor, known as a trailer fee.
- Fee-based advice: these are also bought through an advisor. But in this case, the fund's fees don't include an embedded trailer fee. Investors negotiate compensation directly with their advisor. Many of these are referred to as Series F shares.
- Do-it-yourself: these are bought by investors either through discount brokers or directly from the fund company. Many of these are referred to as Series D shares.
- Institutional: the performance of these share classes is reported gross of fees, as fund companies offer them directly to institutional investors (pension plans, endowments, foundations) or other investors at the discretion of the fund company.
There will also be two tags for funds that are also available for high-net-worth investors and funds that have targeted distributions, such as Series T shares. You can find more details here.
While the fund companies won't be getting rid of the monikers they use, the CIFSC's goal is to organize the share classes in this manner to allow investors and advisors to more easily figure out which ones serve their needs. It will also allow investors to compare similar share classes against one another.
Watch for enhancements to our website and other Morningstar products in coming months as we integrate this share classification system. These enhancements will help identify the category a fund's share class belongs to and allow you to winnow down the many thousands of options based on your desired share class category. Our hope is that this information will allow you make better investment decisions.
