The Great Mutual-Fund Disappearing Act

By Jean Chatzky Sunday, Nov. 17, 2002
    • Now you see it. Now you don't. That has been the story for more and more mutual-fund investors as fund companies have ushered more than 1,100 funds out of existence over the past two years, either by shutting them down and sending whatever money is left back to investors or by merging the assets into other funds. Remember Scudder Growth Opportunity? It has been liquidated. How about Federated Aggressive Growth and Stein Roe International? They have been merged into Federated Kaufmann and Columbia International Stock, respectively. Still to come: the probable disappearance of $1.3 billion worth of growth and international funds from the Berger fund family now that Janus, Berger's corporate cousin, is scheduled to take over the assets.

    If you have experienced a merger, you need to take a close look at what's being done with your money. In some cases, merging is a way for fund companies to make poor-performing funds disappear. It creates what Vanguard founder Jack Bogle, a critic of the practice, calls "survivorship bias": lousy funds are killed so that a fund company's average rate of return rises. Survivorship bias may not have been the goal but was certainly the result in July when Columbia Management Group's Galaxy II Utility fund, with a three-year return of 3.7%, was merged into the Liberty Utilities fund, with a three-year return of 8.4%. (FleetBoston Financial, Columbia's parent, had earlier acquired LibertyFunds.)


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    In other cases, mostly among relatively small funds, erasing a name is an attempt at cost cutting. Many fund firms decide it makes no sense to pay two high-salaried managers and their staffs to maintain similar portfolios. Also, running a fund with modest assets is difficult, and with so many investors feeling burned by stocks, there's little prospect for asset growth anytime soon. That was the case at Putnam, where the $759 million Balanced Retirement Fund was merged into the $4.9 billion George Putnam Fund (another balanced portfolio) as one of 11 fund eliminations.

    If one of your funds is about to be merged, you will typically get at least a month's notice and a voting-proxy statement. (Laws in the state where a fund is chartered determine what a vote outcome must be for a merger to take place.) "You may decide you don't want someone else picking your fund for you," says Russ Kinnel, research director at the fund-tracking firm Morningstar. But don't bail out of a fund before considering the following:

    --TAXES A merger will not immediately affect any built-up gains or losses in your shares. But afterward, a manager is likely to sell some securities to reconstitute the portfolio to his liking. Any net capital gains will be passed on to investors. This could create a tax hit unless you balance gains with losses or your shares are in a tax-free account.

    --FEES AND EXPENSES You will probably get the same deal or a better one in a merged fund, if only because fund companies don't want to add investor ire about fees to investor doubts about the wisdom of a merger. If you're a load-fund investor, staying put after a merger means you will not have to pay another commission on a different fund.

    --PERFORMANCE Typically a poorer-performing fund will be merged into one that has fared better. But don't assume anything. Look up your new fund at morningstar.com to compare its performance with that of its peers.

    --YOUR PORTFOLIO It's important to ask whether the new fund can adequately play the same role in your portfolio as the old one. At Berger the New Generation Fund (oriented toward technology and Internet stocks) was merged into the Mid Cap Growth fund, concentrated in health care and consumer services. Although the new fund has the same manager, a Berger spokesman says it is less aggressive. That might suit you just fine. Or you may not want to sell out of tech at what may be the sector's bottom. Either way, examine whether a new fund upsets your allocation of assets among industries and among large, midsize, small and foreign stocks. Don't let the fund industry's urge to merge mess up your diversification.

    Jean is a columnist for MONEY magazine. You can e-mail her at moneytalk@moneymail.com