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DJ Bucking the Trend, Royce Funds Launches New Load Shares -- Barrons.com

· 02/05/2021 08:59
By Lewis Braham

Fire up the DeLorean. The Royce Funds are stuck in the 1990s and need to come back to the future. In January, the Legg Mason subsidiary announced via a regulatory filing that it would be launching A shares for three of its popular small-cap funds, with a load, or sales charge, as high as 5.25%.

Since the advent of the first S&P 500 exchange-traded fund in 1993, followed by the rise in fee-only as opposed to commission-based financial advice, load mutual funds have experienced a slow, painful decline, losing in excess of $100 billion each year from 2014 through 2019 from shareholder outflows, according to the Investment Company Institute. (Last year's data aren't available yet but will likely continue the trend.)

So why would Royce decide to launch A shares for its Royce Pennsylvania (ticker: PENNX), Royce Premier (RYPRX), and Royce Special Equity (RYSEX) funds, which already have no-load, commission-free share classes?

"Royce is introducing A Shares for three of our mutual funds because we received a request from a key distribution partner with whom we have an existing business relationship and who wanted to provide our small-cap expertise to a broader group of their clients," said Royce spokesman John Davis in an email. He declined to go into any more specifics.

That distribution partner probably has something to do with Franklin Resources (BEN), which acquired parent Legg Mason last July. Franklin runs Franklin Templeton Funds, which, along with American Funds, is one of the few remaining load-fund behemoths. Yet even Franklin got into the ETF game in 2016, and American Funds will be launching ETFs for the first time next year.

Offering more load funds in 2021 "is surprising as the growth of ETFs and advisors shifting to a fee-based business model has made front-end load funds less appealing," notes Todd Rosenbluth, CFRA's head of mutual fund and ETF research. "However, the integration of the Legg Mason family into Franklin is likely the key driver. Franklin has a strong presence with advisors that continue to run their practice using mutual funds."

Another, less savory rationale for the launch could be the 2018 death of the Obama-era fiduciary rule requiring that financial advisors always put the needs of their clients ahead of their own. The rule meant that selling commission-based funds was problematic, leading to a potential bias toward ones with the highest commissions. As a result, a number of fund companies began shifting to no-load funds and what were known as " clean shares" with low, transparent fees.

No longer. "If the fiduciary rule had been in place, A-share products would have been a dying breed," Rosenbluth says. "There's a possibility that the Biden administration might revisit it, making it harder for these funds to survive."

Be that as may, the A-share launch seems a relic of the past.

Email: editors@barrons.com

(END) Dow Jones Newswires

February 05, 2021 08:59 ET (13:59 GMT)

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