In 2005, 222 mutual funds were merged into others, a 66% increase in fund mergers from the year before, The Wall Street Journal reports. And with merger and acquisitions activity increasing among investment management firms, experts expect the trend to continue in 2006.
In particular, smaller companies saddled with increasing regulatory costs are expected to leave the industry and merge their funds into others.
But financial advisers warn investors to pay close attention to mergers as a result of fund companies looking to eliminate poor track records. Further, it's common for a fund that absorbs another fund to have stronger performance. That means that investors in the acquiring fund may experience poorer performance after the funds are combined.
In addition, mergers between funds that don't have the exact same strategy can create capital gains taxes as a result of the need to sell holdings, or possibly require an investor to rebalance their portfolio because of a new investment objective or increased risk.
When a fund announces a merger, "some red flags should go up immediately," cautioned Phil Edwards, managing director of investment services at
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.
