Things to Consider in a Merger
Earlier this month, 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 overall investment objective without the international component.
It’s the kind of nondescript merger that escapes the attention of everyone but the shareholders involved, and sometimes slides past them as well.
This year, according to statistics from CDA Wiesenberger Inc., the mutual fund industry is on track to complete one merger every business day. But that trend doesn’t interest individual investors as 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 intra-company 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.
“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. (By the way, that distorts the average long-term returns of mutual funds; the weaker ones tend to disappear and only the surviving mutual funds are measured.)
Investors in the smaller fund that is merged into a larger fund typically face a new manager, the possibility of changes in investment objective and even a new fund company.
Investors in the surviving fund 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 it is unlikely to have such an effect.
If the new fund isn’t what you originally picked, you need to reconsider the investment.
“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 both the Fund Action and Fund Decoder newsletters. “If . . . the objective of the merged fund overlaps with something else in your portfolio, you will want to make a change to something that meets your needs better.”
Then there is the question of what restrictions are on the managers.
“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 on investors who increase their holdings.
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.
The bottom line is to read your mail when the merger notice arrives and decide if the changes are appropriate for you.
Charles A. 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, MA 02107-2378.
