Investors should remain wary about fund mergers

NEW YORK -- As many investors fled stocks for safer havens in 2002, mutual fund firms have scrambled to liquidate poor-performing funds. While the wave of closures is touted as cost-saving, investors should be wary of what's happening to their money.

The industry has seen more than 1,200 fund mergers or liquidations so far this year, compared to 495 in all of 1997, as companies which rushed new funds into the market in the late 1990s struggled with dwindling assets, according to AMG Data Services.

"It's really a reflection of the excesses of the late '90s and the idea that whenever there was an investment trend, there should be a mutual fund," said the publisher of FundAlarm. com, Roy Weitz. "Investors need to look at every merger proposal from scratch."

The S&P 500 average suffered double-digit losses in the past three years, including about a 20 percent drop this year, leading to heavy outflows in favor of other investments such as bonds and real estate.

Fund firms have responded. Several companies, including Vanguard, are seeking to replace underperforming funds based on, for example, utilities with others focused on dividends or value.

It's not just funds that are merging, but fund groups. Most recently, Janus Capital Management assumed control of its former parent, Stilwell Financial, and planned to take over $1 billion in growth and international fund assets from its corporate cousin, Berger Financial Group, as part of an effort to cut redundant costs.

Analysts said the mergers and liquidations should largely benefit investors, as many companies get rid of high-cost, low-return funds that will likely help lower expenses in the long run.

'There's often confusion'

But in some cases, moving to another firm may be the better option, they said.

"When fund companies merge, there's often confusion for investors," said Russ Kinnel, director of fund research at Morningstar Inc. So "if you think a fund is going to merge, you can get out now, rather than letting the fund company decide for you where it's going to merge."

Financial planners advise investors to consider whether they are satisfied with their current portfolio's objective and determine if it may change.

If a utilities fund is merged into one more focused on dividend-paying companies from various industries, for example, bailing out might make sense if investors are seeking a safe-haven investment, but not if they believe utilities represents a significant growth opportunity.

Whether a fund manager is staying also should play a role. Marilyn R. Berger, a certified financial planner in Portland, Ore., suggests that investors stay with a newly merged fund for the first year but be on guard for possible personnel changes.

"It's critical that if they stay with a fund, they keep track of the people who are managing it," she said. "If the management team seems intact and you're happy with the fund performance in comparison with other categories, there isn't any reason to bail out."

And being aware of fees and performance remains important. In most cases, a fund will be merged into a better performing one, leading to higher returns and lower fees, planners say.

But double-checking is always wise. Details generally can be found in literature sent to investors months before a change, or on Web sites such as morningstar.com.

Finally, investors should be mindful of taxes. After a merger, managers typically will sell securities to shape the fund to their liking. That could lead to capital gains taxes if the winners outweigh the losers, although that is less likely in the current bear market.

"Investors need to ask, 'Is this newly merged fund something that I want and would've bought in the first place,'" Weitz said. "If not, there's no reason to hold."

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