Mutual Series Deal Means Opportunity

The upcoming merger of the Mutual Series family with the Franklin Templeton Funds will create a formidable investment firm with impressive credentials in the realm of U.S. and foreign stocks as well as tax-free bonds.

It will also create some commission-saving opportunities for investors who act quickly.

One of the quirks of the $610- million deal is that it opens a temporary window for investors to buy Franklin Templeton mutual funds without paying a sales charge. It also heralds the end of the no-load era for the Mutual Series portfolios, at least for people who don’t plan ahead.

Mutual Series of Short Hills, N.J., has for years been selling directly to investors without applying any sales charges. For new shareholders, this will change as a result of the merger. But investors who already have accounts in any of these funds by the time the merger closes sometime around Oct. 31 will still be able to buy more shares in any of the offerings on a no-load basis after that.

“Current shareholders of Mutual Series who are in the funds before the closing of the agreement will be grandfathered,” says Holly Gibson, a spokeswoman for Franklin Templeton in San Mateo, Calif. “They will be able to buy additional shares in Mutual Series without a sales charge.”

That’s no small benefit, as the Mutual Series portfolios are among the best around. The group’s four established stock funds--Mutual Shares, Mutual Beacon, Mutual Discovery and Mutual Qualified--all enjoy top ratings from Morningstar Inc. of Chicago. The group’s new Mutual European portfolio is too young to be rated.

Managers of the five funds, led by Michael Price, take a “value” stock-picking approach. They seek out stocks believed to be trading below their intrinsic worth, based on such measures as a low price-earnings ratio. Price and the group’s other managers like to snatch up shares of companies involved in mergers, reorganizations and the like.

The Mutual Series funds have about $17 billion in assets, whereas the Franklin Templeton group counts $145 billion.

Of the four established portfolios, Mutual Discovery is perhaps the most unusual because it invests in smaller companies. It’s the favorite of Ken Gregory, editor of the No-Load Fund Analyst newsletter in San Francisco.

“It’s almost an irreplaceable fund, as it has such an eclectic mix of investments,” he says.

But Mutual Beacon is the only one of the group to be named to Forbes magazine’s mutual fund honor roll, joining 17 other funds, including Franklin Growth. Mutual Beacon is a favorite of Don Wilkinson of FSC Advisory Corp. in Newport Beach, though he considers any of the Mutual Series products to be good choices for conservative investors.

Expense ratios on the Mutual Series funds vary from about 0.7% to 1% annually, equal to $7 to $10 for each $1,000 invested. Expenses are not likely to change much as a result of the merger, the firms say.

Investment minimums for the Mutual Series funds ([800] 553-3014) range from $1,000 to $5,000.

The group’s investment management team and stock-picking philosophy will remain the same following the merger, but it’s not clear for how long. Price has a five-year employment contract with Franklin, but he can go part time after a single year.

“At issue is how long will Michael Price stay, and whether it will make any difference,” says Gregory.

Five other Mutual Series managers also have five-year contracts.

Should performance of the Mutual Series portfolios stumble, shareholders can transfer into any of the Franklin Templeton funds without paying a sales charge, as long as they wait a minimum of six months. In fact, investors who have no real interest in the Mutual Series funds can use them as vehicles to buy into Franklin or Templeton funds commission-free, again subject to the six-month wait.

Gregory and Wilkinson both suggest that investors consider using the Mutual Series route as a “backdoor play” into Templeton Developing Markets, a foreign fund run by Mark Mobius, a dean of Third World investing. The portfolio normally charges a load of up to 5.75%.

Also worth a look are domestic stock portfolios such as Franklin Growth. Wilkinson likes Franklin California Growth, an unusual stock product that focuses on companies based in the Golden State.

“Most people seem to believe that California’s economy is on the rebound,” says Wilkinson. “This fund provides a way to invest in California without having to put your money in real estate.”

And then there’s the family’s huge stable of municipal bond funds, including Franklin California Tax-Free Income, a $13-billion behemoth. Franklin ([800] 342-5236) already rates as the largest manager of tax-free mutual funds with more than $40 billion here. Adding a solid lineup of value-oriented stock funds will only increase its appeal, especially among do-it-yourself investors.