Will Mutual Funds Start Paying for Loyalty?

A Dallas-based closed-end fund pays shareholders a bonus for holding it for a year. Will others follow?

A Dallas-based closed-end fund pays shareholders a bonus for holding it for a year. Will others follow?

Rather than wait for loyalty points, savers should be aware of the big impact fees have on retirement plans. Fees can drain tens of thousands of dollars over the life of an average individual account. "The best thing fund companies can do to reward you for being loyal is to charge you low prices every day. Just like Wal-Mart wins your business in stores – just as Vanguard does with low-cost funds," Webb says.

NexPoint says it does not see itself as a pioneer in the loyalty points program. It's using its rebate to solve a special problem related specifically to closed-end funds like NexPoint. Since closed-end funds are pools of assets – equity or income – that trade as shares on exchange, the share value can dip below the value of the holdings. That creates still more churn as some short-term investors swoop in to buy them at discount for a quick gain.

"This [loyalty program] is very interesting for advisors who sell the closed-end funds," says Rose F. DiMartino, a partner in the Asset Management Group of Willkie Farr & Gallagher in New York. "They worry about losing assets in closed-end funds."

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The program also distorts the value of the shares, Mitts says. His fund trades at a 12 percent discount to value despite having a strong total one-year return of 26.81 percent and a three-year annual return of 12.62 percent as of August 31. The fund, with a 2.26 percent expense ratio (which, it should be noted, is higher than the 2 percent rebate), invests mostly in floating-rate notes, which are non-investment grade senior bank loans. It rates a modest two-star from Morningstar, but Fitch rates NexPoints's own credit as AAA. The fund saw big losses during the credit crisis of 2008, however, and floating-rate issues are vulnerable to defaults in weaker economic times.

Will others funds follow NexPoint? They're likely watching with skepticism. DiMartino says other fund companies will look at what happens with NexPoint, but the closed-end sector might be the asset group in which a rebate makes the most sense. Traditional mutual funds are not as likely to follow anytime soon.