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Takeover Mutual Funds

- Alan Lavine and Gail Liberman

Before you invest in a mutual fund that owns stocks that could be acquired, take a close look at the fund and how it invests. If you invest in the wrong type of takeover fund, you might be disappointed with the results.

Analysts say that takeover activity is on the rise this year. The reasons: Interest rates are low. It is cheaper to buy a company than it is to build a new one. Many stocks are undervalued. Plus, there are some complex accounting rule changes that make takeovers more appealing.

Conservative funds that attempt to make small profits on mergers and acquisitions are different than funds that make big bets on hot target stocks.

Funds, like the Westchester Capital Management-advised Merger Fund, Gabelli ABC Fund and the Enterprise Mergers and Acquisitions Fund, are conservative funds. The fund managers engage in arbitrage. That means the funds try to profit from the price differential between the acquiring and target companies.

These funds are considered a lower-risk way to invest in takeovers, according to Morningstar Inc., Chicago. The managers typically donšt buy the stocks until the deals are announced and they make a small profit on each trade. Want bigger profits? You have to take on more risk. This also means you could lose more.

You can buy individual stocks with the help of a broker. Or Morningstar says you can invest in a fund like the Gabelli Value Fund. This fund often owns companies that are merged or acquired. It is similar to the Gabelli Asset Fund, but concentrates on owning fewer stocks in the hope of earning higher returns. Morningstar analyst Langdon Healy, in his most recent report, said the Gabelli Value Fund is a good choice for investors who want to own undervalued stocks in the media and telecommunications sectors.

Be advised not every stock purchased by this fund is the subject of a takeover. Many are bought and held for the long term.

Over the past five years, the fund has grown at a 7 percent annual rate. It ranks 81st of 219 large company value funds, according to Lipper Inc., New York. The fundšs top 10 holdings make up about one-third of the portfoliošs total assets. They include: Viacom, Media General, Cablevision Systems, Liberty Media, Telephone and Data Systems, Navistar, American Express, Time Warner and Newmont Mining.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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