Roughly one in every 20 mutual funds will be merged or liquidated this year.
What’s more, with 2000 ready to shatter records for fund shutdowns, and with the pace expected to accelerate, the odds increase every day that the next closing could hit home.
The vaporized funds have tended to be small, not-so-popular issues, but their closings affect millions of ordinary investors. What’s more, because funds are killed off in two distinct ways — through merger or by liquidation — it’s important to know what to do in case your fund is next.
Fund mergers often follow deals between parent companies. The acquiring fund firm is often after assets more than funds themselves, and so it merges away any redundancies, combining similar funds to reduce administrative costs.
If your fund is being merged into oblivion, your money moves to the surviving fund, which usually follows a similar strategy. If you are in the surviving fund, the merger means more assets and can sometimes affect the fund’s ongoing investment strategy.
Either way, mergers are preferable to liquidation, in which you get your money back in what amounts to a forced taxable event. The liquidation works as if you had told the fund company to sell your shares and close your account.
Through September, according to Wiesenberger/Thomson Financial, which tracks fund activity, there were roughly 420 fund mergers and 180 liquidations, breaking the 12-month record for mergers and nearing the top mark in liquidations.
What’s more, those numbers don’t include several recent filings, including the early October announcement that Liberty Financial will merge 17 of 95 funds out of existence by January. The company operates several fund management units, including the former Stein Roe, Acorn, Colonial and Newport funds.
“If you’re a shareholder, a merger is better than a liquidation because you at least control the tax consequences,” says Ramy Shaalan, mutual fund analyst at Wiesenberger. “But either way, most of the time we’re not talking about losing some great fund. Great funds don’t usually merge or liquidate.”
Indeed, that’s why the current consolidation and closure activity is good for the fund business.
More likely, investors in a merging or closing fund have stuck by a laggard. The change forces the investor to move on, which can be a good thing.
For starters, in a merger there is something to be said for moving from the unloved stepchild of the fund firm to a favored, larger issue that has been provided with better management and research capabilities. Larger funds also tend to be more efficient, which can keep costs down.
Just don’t assume that’s what’s happening.
Some mergers just move money from one lackluster fund to the next while changing the kinds of assets your money is buying. While none of the mergers thus far in 2000 has been egregious and combined, say, a government bond fund into a technology sector fund, the past is strewn with strange marriages in which investors were thrown off an asset-allocation plan.
Mergers get even trickier in bond funds. Many firms fold single-state bond funds into general-purpose muni-bond funds, which can change the tax efficiency. Mergers of Treasury funds have been known to leave people who bought short-term bond funds owning riskier long-term issues.
As a result, check every merger — whether your fund is going out of existence or acquiring the assets of another fund — with an eye toward how the new fund fits into your investment plans. If the fit is bad, it’s time to move on.
If your fund is being liquidated, your hand is being forced.
Don’t hang around to be the last one out the door. When a fund shuts down completely, you get the value of your account on its last day. To get to that point, however, the fund may have to pay expenses associated with the closing, and its need to sell all holdings to cash out may not result in its getting the best price for what it owns.
Those differences may be small, but you’re better off picking the time of your departure and transferring money into a different fund within the family or pulling your cash and redirecting it elsewhere.
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Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.
