Although the number of mutual fund share classes or funds themselves that were merged or eliminated in 2004 dropped sharply from the two years earlier, fund mergers remained at historically high levels, Standard & Poor's reported Thursday. Last year, there were 479 such mergers. In 2003, there were 781, and in 2002, 714.

Four main reasons why fund companies are eliminating share classes and/or product, S&P said, are:

  • Continued streamlining in a saturated market;
  • Performance concerns alleviated through survivorship bias;
  • Increased costs;
  • Stricter regulations.

"Fund mergers and liquidations may also result from new fund offerings not attracting sufficient cash flow, thus preventing normal operations," noted Rosanne Pane, an S&P mutual fund strategist.

But the mergers are not necessarily good news for investors. While it is true that the acquiring funds generally perform better post-merger (S&P research showed a differential of 1.6 percentage points in 2003), investors may be hit with new sales charges, fees or expenses. There also could be taxes owed on distributions. In addition, a larger asset base could pose investment challenges for the portfolio manager, let alone additional risk, volatility and operational changes.

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