Global Leveraged Equity Fund (GLEF) has three classes of shares, each holding the same portfolio of securities
Question:
Global Leveraged Equity Fund (GLEF) has three classes of shares, each holding the same portfolio of securities but having a different expense structure. The following table summarizes the expenses of these classes of shares.
Expense
Expense Comparison for Four Classes of GLEF
Class A Class B ClassC
| 5% | None 4% in the first year declining by 1% each year thereafter | None |
Deferred sales charge (load) | None | | 1% for the initial 2 years only |
| | | |
Distribution fee: | .25 | .5 | .5 |
Management fee: | .5 | .5 | .5 |
Other expenses | .5 | .5 | .5 |
*Class B shares automatically convert to Class A shares 72 months (6 years) after purchase.
Assume that expense percentages given will be constant at the given values. Assume that the deferred sales charges are computed on the basis of NAV.
An investor is considering the purchase of GLEF shares. The investor expects equity investments with risk characteristics similar to GLEF to earn 9 percent per year. He decides to make his selection of fund share class based on an assumed 9 percent return each year, gross of any of the expenses given in the preceding table.
1.
You have analyzed the relative performance of different classes of GLEF shares for liquidation in several years. Specifically, you have looked at liquidation in years 1, 3, 5, and 15. Your results are as follows. (The > symbol implies that the class preceding the sign performs better than the class following and the = symbol implies equal performance of the two classes.)
Liquidation in year 1: Class C > Class B > Class A
Liquidation in year 3: Class C > Class B > Class A
Liquidation in year 5: Class B = Class C > Class A
Liquidation in year 15: Class B > Class C > Class A
Provide an intuitive explanation for the pattern of relative performance that you observe