A difference in governance exists between mutual funds with one share class and those with multiple share classes. Multiple share (MS) class mutual funds are likelier to have lower board quality ratings, have managers whose wealth and compensation is less dependent on fund performance and charge higher fees than their single-share class funds.

Board quality attempts to measure the extent to which a mutual fund’s board acts on behalf of shareholders. Mutual fund boards can both influence fees and exert oversight on how the fund is managed. A higher quality board will push for shareholders’ best interests, negotiate fees and push the firm to offer only mutual funds it can operate well. Multiple share class funds are likelier to have lower board quality ratings than single class funds.

Fund managers who own a significant stake in the funds they manage may push for lower expense ratios to help boost returns. While in aggregate, there does not appear to be a difference between single and multiple share class funds when board ratings and corporate culture are considered, the multiple share class funds are shown to have worse managerial ratings.

In terms of fees, 80% of funds with multiple share classes have at least one share class where a load is charged. A load is a separate fee assessed for either purchasing (front-end) or selling (back-end) shares. The study’s authors described this fact as being “expected given that MS class funds are targeted to the advisor-sold channel.” In addition, 64% of multiple share class funds have a share class assessing a 12b-1 fee (an annual distribution fee) versus just 50% of all funds. Overall, multiple share class funds tend to have higher fees.

The analysis is based on Morningstar’s stewardship ratings. These ratings attempt to show whether a mutual fund’s parent company has its interests aligned with shareholders. The study’s authors looked at growth and income, growth, aggressive growth and small-cap funds using year-end data for the period of 2005 through 2009.

Source: “Are Multiple Share Class Investors Disadvantaged? Evidence from Morningstar Stewardship Grades,” by Jonathan Handy and Thomas Smythe; SSRN, September 20, 2018.