Question

a)UOB Greater-China fund sells Class A shares with a front-end load of 8% and no expense ratio and Class B Shares with an expense ratio of 2% annually charged on end of year asset values. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume assets of the fund grows 10% annually, and no distributions are paid to investors.

Class A

Class B

There is no difference.

There is insufficient information given.

b)Citibank U.S. Growth fund sells Class A shares with a front-end load of 3% and back-end load of 7% and no expense ratio and Class B Shares with an expense ratio of 2% annually, charged on end of year asset values. Assume assets of the fund grows 10% annually, and no distributions are paid to investors. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice?

		Class A
		Class B
		There is no difference.
		There is insufficient information given.

Answer 1

There are 2 classes of shares for investment. Annual rate of return is 10%. Class of shares which would have higher value post adjustment of all the expenses or front/back-end load, will be considered better choice. So, accordingly solution is as below -

Solution to a

Suppose you have $1000 to invest in the UOB China Fund. The initial investment in Class A shares is $920 net of the front-end load. After 4 years, portfolio will be worth:

$920 x (1.10)^{4 =} $1346.972

Class B shares allows to invest full $1000 as there is no front-end load, however, 2% annual expense is charged on that, which means that effective return each year would be 8%. So, portfolio value after 4 years would be:

$1000 x (1.08)⁴ = $ 1360.489

So, in Class A shares portfolio value after 4 yrs would be $ 1346.972 and in Class B shares portfolio value after 4 years would be $ 1360.489, so Class B shares are better choice as it is giving higher value compared to Class A shares.

Solution to b

Suppose you have $1000 to invest in Citibank U.S. Growth fund. The initial investment in Class A shares will be $970 net of the front-end load.

After 4 years, portfolio will be worth:

$970 x (1.10)^{4 =} $1420.177

Also there is back-end load of 7%, so final portfolio worth after paying back-end load would be:

$1420.177 x 93% = $ 1320.765

Class B shares allows to invest full $1000 as there is no front-end load, however, 2% annual expense is charged on that, which means that effective return each year would be 8%. So, portfolio value after 4 years would be:

$1000 x (1.08)⁴ = $ 1360.489

So, in Class A shares portfolio value after 4 yrs would be $ 1320.765 and in Class B shares portfolio value after 4 years would be $ 1360.489, so Class B shares are better choice as it is giving higher value compared to Class A shares.