LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760
Thursday, Nov. 8
Q. Don, we've seen a rising number of fund mergers, and a few fundsclosing down, lately. What is going on?A. It's part of the normal ebb and flow of the fund business. And Ishould add that when a mutual fund closes down, it's not at all like awidget maker shutting its doors: closing down a fund means all thesecurities it holds are sold in an orderly fashion and the net asset valueis distributed to holders promptly.
Q. Well, OK, any tally on how MANY mergers among funds there have been?
A. Sure our data at Lipper show that we had 230 fund mergers in all oflast year, and we have just reached the 200 mark for 2001 to date. This isout of about 12,000 different US funds, so we're talking about 2% a year...
Q. Why do mutual funds tend to merge?
A. Usually there are 3 main reasons...
1. The fund MANAGEMENT companies merge, and some of their existingfunds are very similar, such as having the same investment objective orstyle. They merge to cut out duplicated costs.
2. A given fund may not have become very large over time, maybe under$30-50 million, so continuing to run it as a separate entity results in ahigh expense ratio for the holders AND IMPORTANTLY, the fund is a moneyloser for the advisory firm.
3. A given fund may not have been a good performer, so merging it intoa similar fund makes the performance record disappear from the databasesand the prospectuses. This could be because the fund itself madeunfortunate investment choices, or because perhaps its particular style orobjective was out of favor -- internet, technology, large-cap growth arerecent examples.
Q. What is the tax consequence of a fund being merged?
A. Quite different from a liquidation. In a liquidation you have anunavoidable "sale" event for tax purposes that will result in a gain orloss. In a merger, they are always structured as a stock-for-stockexchange or "swap," so there is NO current direct tax consequence. Thenumber of shares you get in the surviving fund will have an equal dollarvalue, on the day of the merger, as the shares in the old fund that isbeing absorbed.
Q. You said no DIRECT tax consequence...
A. Right. In many cases, if there is a large net overhanging unrealizedgain on investments held, the fund that will be absorbed may sell torealize some gains and pay a distribution, so it is not bringing adisproportional tax liability into the acquiring fund.
Q. What should people DO when they are notified of a fund merger? Do theyhave any choices?
A. First, they are usually given a chance to vote yes or no on the deal.In reality, VERY seldom is one turned down, but you can vote as you please.Certainly at least read the proxy closely, as it will tell you about thenew fund you would be getting, and its manager.
Second, you definitely should use the event of the merger as a decisiontrigger, to take a look at your overall holdings and see if what you willget is what you want and need.
Q. Explain that a little.
A. OK. Suppose you had a biotechnology fund, and they plan to merge itinto a general health-care fund. You really had decided you wanted aspecialized biotech fund. Or you already own another general health-carefund and this would put you overweighted in that broad area, while takingaway the special emphasis you wanted. You should sell out and repurchaseanother fund that does what you want.
Q. Is that the only reason?
A. Not at all. Take a look at your overall asset allocation. Pretend youare thinking about BUYING the fund you are going to be given in the merger.Would that make sense? IS THAT the fund of that type that you wouldactually CHOOSE?
Or suppose the manager of the new fund has not been there long, so there islittle way to judge his or her record. Maybe you would not buy. What I'msaying is, don't be a victim or take these events passively. USE them as atrigger to do some thinking. DECIDE what you want, rather than acceptingwhat is going to be given to you. You HAVE a choice.
Q. What about taxes? Suppose you have a huge gain in the fund that isbeing absorbed because you held it a long time...
A. A legitimate concern. There is no magic mathematical formula. But tosell it involves more serious hurdles, such as over-weighting, than if youhad no gain or a small one. But STILL, I would ask whether you'd BUY thenew fund or not. If the answer is no, and there is a gain, find somethingelse you have a loss in, and match them up before year-end. Again, don'tbe a victim or just be passive. Use the merger event as a trigger to lookat your whole situation and decide if some changes are in order.
