When mutual funds act on the urge to merge, make sure their objectives dont diverge, financial advisors are cautioning.
A key point in monitoring clients mutual fund holdings is to make sure the new funds remain true to their initial investment objectives, advisors say.
Fund mergers and liquidations continue an uptick that hit full tilt in 2000 when the total climbed to 1,098 from 720 in 1999, according to data provided by Lipper Inc., a Reuters company.
In 2001, the figure rose to 1,460 and year-to-date 2002, mergers and liquidations stand at 934, Lipper found. So far, the grand total for the four years is 4,212.
The number of funds in 2001 did grow but by a scant 152 funds, the smallest increase since 1981, according to the ICI 2002 Fact Book of the Investment Company Institute, Washington.
In this kind of environment, beware of “style drift,” says Therese Mieke, associate vice president, investments and a CFP with A.G. Edwards, Naperville, Ill.
In many cases, mergers are seamless, she continues, but advisors have to “make sure funds have the same objectives–that they are what they say they are.”
Advisors should also make sure a merger is not camouflaging poor performance, she adds. Sometimes, fund family performance averages do not include the performance of funds that have been merged out of existence, she adds.
It comes down to one basic question, “Why do we own this fund to begin with?” says Guy Cumbie of Cumbie Advisory Services, Fort Worth, Texas.
Cumbie, a certified financial planner and the chairman of the board of the Financial Planning Association, Atlanta, says once that question is answered, the planner needs to assess whether the reason the fund was originally purchased remains valid. If the clients situation has changed, the planner needs to determine whether that fund is still appropriate to meet a clients objectives, he adds.