Are Up Front Savings On Closed End Funds For Real?

Typically, if you buy a closed-end mutual fund through a brokerage firm when it's first offered, you have to pay an up-front sales fee, or load. The charge, which runs 6% to 7% of the amount you invest, helps pay the brokers' commissions but cuts into your return.

Now, a handful of securities houses have begun selling closed-end funds that carry no loads. The immediate advantages are hard to dispute. "Compared to a normal closed-end fund where you have 94 cents left (after the load), with ours you have $1 working for you on day one," says Jerome Miller, president of Shearson's Asset Management Group.

Still, no one's giving anything away. Without a load, some of these funds charge a higher percentage in annual expenses to cover the commission. "You still pay the broker," says Catherine Gillis, editor of Morningstar Closed-End Funds. "It's just a matter of when."

Van Kampen Merritt, which began offering the first no-load closed-end funds late last year, has a 1.49% expense ratio--management and operating expenses to shareholder assets--on its Municipal Trust. That's higher than Morningstar's averages for either closed-end municipal funds (0.93%) or open-end muni-bond funds (0.78%). "A higher expense ratio heightens the hurdle the manager has to jump over to make a decent return," says Gillis.

One bargain is Smith Barney's Intermediate Municipal Fund, which estimates its expense ratio at just over half a percentage point.

TRADING DOWN. Since the funds are so new, it's hard to evaluate their performance. Shearson's Managed Municipals won't start trading until July 17. (Investors buy the shares of closed-end funds through initial public offerings and sell them like stocks to cash out.) Van Kampen's no-load funds show attractive yields, but they come at the expense of leverage: It borrows money at lower short-term rates, invests at higher long-term rates, and captures the difference. Its Municipal Trust yielded 6.97% through June 30, compared with Morningstar's average of 6.8%. And many of the Van Kampen no-loads are trading at discounts to their offering price, so investors who bought at the offering and want to cash out may lose principal.

Regardless, the funds' purveyors insist that no-loads are a good deal. But with a product that is less than a year old, that claim is hard to prove.