The mutual fund industry continues to shrink even as assets swell.
Fund manager T. Rowe Price has set plans to acquire six index funds that will be merged into its existing fund lineup as discount broker TD Waterhouse hands over the reins and shuts down its proprietary mutual fund business.
In a recent N-14 regulatory filing, TD Waterhouse, the brokerage unit of Toronto Dominion Bank, said that it plans to fold its Trust series of funds - the Bond Index, Dow 30, 500 Index, Extended Market Index, Asian Pacific Index and European Index funds - into index funds advised by T. Rowe Price Associates or T. Rowe Price International.
Collectively, the funds represent $415 million in assets, according to TD Waterhouse spokesman Kevin Dinino. The newly captured money would boost the number of index fund assets at T. Rowe to roughly $9.8 billion.
The proposed acquisition builds on an existing relationship between the two firms in which T. Rowe manages seven sub-advised equity funds for Toronto Dominion, which distributes to broker/dealers in Canada as well as through their own financial planners and bank branches in Canada. T. Rowe serves as its sole active manager in the U.S. with the latest move firming up that distribution relationship. TD Waterhouse has also been selling T. Rowe retail mutual funds in the U.S. for many years.
TD Waterhouse has advised shareholders to approve the reorganization, in part, because the acquiring funds "track the same or a comparable index" and "the fees and expenses of each Price fund are the same or lower in the aggregate than those of the respective TDW fund." The reorganization is subject to SEC and shareholder approval. A shareholder vote is scheduled for June 7 at its offices at 100 Wall Street.
"It's a logical move for both companies because the open-end index fund business is a very difficult business to be competitive in," said John Benvenuto, a mutual fund analyst at Boston's Financial Research Corp..
What really makes sense though, he added, is that TD has allowed investors to carry over into a very similar strategy. In some instances the offerings will become a little broader, as would be the case with the Asia Pacific Index Fund being merged with the T. Rowe Price International Equity Index Fund. For the most part, however, the acquiring funds are still very much in line with the type of investments its shareholders were seeking, Benvenuto said.
Shrinking Fund Universe
The move is indicative of a larger trend of consolidation in the fund industry whereby major fund houses are acquiring assets from smaller players who are trying to focus more on their core businesses, oftentimes because the selling firms have not realized the economies of scale necessary for running a viable fund operation. On the buy side of the equation, targeted acquisitions, including fund adoptions and product add-ons, have helped fill the gaps at firms looking to revive slumping business.
T. Rowe is just one of many firms either selectively or aggressively buying up and seeking out new assets. Pioneer Investments, Federated Investors, Charles Schwab and Dreyfus have each acquired fund assets from banks and other mutual fund shops in recent months.
In this case, TD Waterhouse was looking to focus more on its core competency, which is distributing through its branch retail brokerage model and working with the advisors. The firm will no longer offer proprietary mutual funds, but it will continue to sell more than 10,000 funds managed by 235 different fund families, according to its Web site.
The sale of the six TD Waterhouse funds is consistent with the rationalization that is occurring at most of the distributors in the fund community. "This fits right in with what we're seeing at smaller banks and smaller organizations [where] maybe their core business is not the creation and management of investment products," Benvenuto said. "I would expect to see more of this as firms line up to take over assets as cheaply as possible."
T. Rowe said the added assets would help bolster its index offerings, which have become increasingly popular among investors concerned about hefty advisory fees. "We're always on the lookout for worthwhile acquisitions," said Steve Norwitz, a spokesman for T. Rowe. He declined to comment on the financial terms of the proposed deal.
Index funds are considered by many industry observers to be a cheap alternative to traditional mutual funds because there's no stock selection process involved, enabling fund firms to offer them at bargain-basement prices. Also, they're more transparent vehicles in the sense that shareholders always know what stocks are held in the portfolio because it tracks the performance of a specific industry or benchmark.
No Taxes, No Penalties
Under the terms of the proposed reorganization, TD Waterhouse index fund investors will exchange their shares in these funds, on a tax-free basis, for shares of equal value in the T. Rowe Price funds. In light of the looming shakeup, TD Waterhouse has suspended all purchases into the TD Waterhouse funds, effective March 23.
Customers can still redeem their shares at any time up until to the scheduled reorganization date of June 17. Shareholders may end up with a different number of shares compared to what they originally held due to differences in valuation methodology, but the total dollar value will remain the same.
The $168 million TD Waterhouse Dow 30 fund, its largest index offering, will also be subject to a change in its investment objective, pending shareholder approval, from seeking to match the total return of the Dow Jones Industrial Average to matching the performance of the S&P 500. Switching the benchmark is contingent upon the approval of the reorganization as a whole. If approved, the change will be implemented two weeks ahead of the completion of the reorganization, according to the filing.
The $14 million Asian Pacific Index Fund will also change its investment objective to mirror that of the T. Rowe Price International Equity Index Fund, which seeks to provide long-term capital growth tracking the FTSE International Limited Developed ex North America index. The shift will also take place two weeks prior to the official reorganization date, the filing said.
TD Waterhouse expects that the stocks currently held in the Dow 30 and Asian Pacific Index funds will be sold and replaced with new securities in order to meet the new investment objective. This could prompt shareholders to dump fund shares since the makeup of the portfolios would change drastically. As a protection for shareholders, TD Waterhouse said it would waive all redemption fees that might otherwise apply to withdrawals on or after March 23.
The two firms plan to issue a joint press release once they have received shareholder and regulatory approval, the TD Waterhouse spokesman said.