Last week, Fidelity Investments asked shareholders of its Short-Term World Bond Fund to approve a merger.
The small global bond fund has had volatile performance and hasn’t been particularly attractive to investors, so Fidelity plans to fold it into the company’s Short Term Bond Fund, a $1 billion investment pool that essentially has the same investment objective without the international component.
It’s the kind of non-descript merger that escapes the attention of everyone but the shareholders involved, and sometimes even slides past them.
This year, according to statistics from CDA Wiesenberger Inc., the mutual fund industry is on a pace to complete one merger every business day. But that trend doesn’t interest individual investors so much as the question of what to do when their mail contains the notice that a merger is on the way.
“There is no one way to look at how a merger affects you,” says Dan Phelps, senior analyst at CDA Wiesenberger. “Each situation is different depending on the funds, your investment objective and the individual circumstances of the deal.”
Fund mergers take a lot of shapes and forms. There are the intracompany deals such as Fidelity’s; two-company consolidations where merging groups mix funds with overlapping objectives; and the nearly inconsequential deals where management combines share classes. (Technically, one portfolio sold different ways–in A-, B- and C-class shares–counts as multiple funds.)
“The threshold question for any investor is whether the things that encouraged you to buy the fund in the first place are changing as a result of the merger,” says Michael Stolper, editor of the Mutual Fund Monthly newsletter. “Maybe you bought the fund for a manager who is now leaving, or for the fund’s objective or assets. Look at what, if anything, is changing. It’s not much more complicated than that.”
Typically, management companies fold smaller, less successful funds into bigger, more established peers. Investors in the smaller fund typically face a new manager, the possibility of changes in investment objective and even a new fund company.
Investors in the fund whose name and charter survive the merger should limit their concerns to the manager and whether the new assets in the fund change the character of the overall portfolio, a shift called “style drift.” That would include a case where the international holdings of the Short-Term World Bond Fund cast a different flavor on the plain-vanilla Short-Term Bond Fund, although Fidelity’s global bond fund is so small that it is unlikely to have such an effect.
The ideal situation is for the merged fund to look like a clone for the investment you picked initially. If it doesn’t, then it’s time to see if this is something you would have purchased on your own.
“Funds explain what the nature of the new fund is going to be, but investors really have to look most at how it affects their own portfolio,” says Betsy Treitler, executive editor of the Fund Action and Fund Decoder newsletters. “If you wanted international exposure and now you aren’t going to get it–or if the objective of the merged fund overlaps with something else in your portfolio–you will want to make a change.”
Your concerns go beyond the manager and investment objective. Consider how the merged fund plans to achieve its results.
“Two funds may buy the same thing but have charters that allow them to do it differently,” says Don Christensen, editor of The Insider Outlook. “They may both be described in the same manner, but one manager may have had the ability to take more risks–buying derivatives or selling short or whatever–that you might not be comfortable with. A merger is a red-flag opportunity to assess whether a fund is doing what you wanted it to do, in the way you wanted it done.”
Mergers between fund groups also bear watching. When Franklin Resources agreed to buy the Mutual Series funds earlier this year, Mutual investors worried that their star manager, Michael Price, would leave or that the heretofore no-load funds would impose a sales charge.
Price, however, is staying with the firm for several years and Franklin’s plans to add sales fees will not apply to investors who own Mutual’s funds when the merger is complete. Still, industry watchers suggest diligence after any merger situation–whether individual funds or entire families–noting that subtle changes in a fund add up over time.
“When the merger notice arrives, look at what is changing and whether it was important to your initial investment decision,” says Stolper. “If any of those factors has changed, then you have to ask yourself if you would buy the new fund today. That’s when you compare the merged fund to the alternatives and decide whether to OK the proxy and keep the fund or dump it and find something that suits you better.”
JOINING FORCES
This table shows the number of mutual funds involved in mergers each year in this decade. Mergers include deals that combine two share classes of the same fund. The figure for 1996 includes only those mergers completed as of July 31. %%
Year Funds
1990 60
1991 98
1992 160
1993 106
1994 188
1995 606
1996 *296
Source: CDA Wiesenberger Inc.
———-
Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe378. %%
