After a year filled with mergers, one may think that mutual funds that specialize in investing in this sector, would likewise surge. However, despite the recent increase in mergers, these funds are delivering lackluster returns, according to The Wall Street Journal.
These funds had wide-ranging results last year, from 0.25% losses to gains of up to 5%. Many barely passed stock market benchmarks.
The Gabelli ABC Fund reopened two years ago and has struggled to outperform its benchmark ever since. The Merger Fund posted a return of 0.81% last year. The Arbitrage Fund saw losses of 0.24% for the year ending this February.
Last year was the biggest year for mergers and acquisitions since 2000. There were over $2.7 trillion in deals, including one between Procter & Gamble Co. and Gillette Co., and ConocoPhillips' $35.4 billion takeover of natural-gas producer Burlington Resources.
The popularity of these deals puts those who bet on mergers and acquisitions at an advantage, and prompts other investors to begin using the same strategy.
However big deals do not guarantee big returns because funds have had the tendency to chase the same deals even though there are many more available. As a result, the stock prices of target companies shoot up, leaving little room for later profits once the deal has already gone through.