March 30, 2005 — With big name mergers and acquisitions making headlines recently, mutual funds aren’t escaping the trend either. In fact, JP Morgan recently announced the official completion of the integration between JPMorgan Funds & One Group Mutual Funds, creating the largest fund merger in the industry’s history.
Mergers have been quite popular over the past few years with an amendment to the SEC’s expanded scope for mergers between funds rule 17a-8 in 2002, which permits all affiliated funds to merge, regardless of the reason for the funds’ affiliation, and requires that each fund’s board (including a majority of disinterested directors) determine that the merger is in the best interests of the fund, and will not dilute the interests of shareholders.
Fund mergers can occur for various reasons, including fund management companies joining forces to provide more diversified products to their clients or in order to target different audiences such as institutional or retail investors. Fund mergers and liquidations may also result from new fund offerings not attracting sufficient cash flow, thus preventing normal operations. Other factors that may lead to a merger include declining assets, steadily increasing expense ratios, and poor fund performance.
When struggling or poorly performing funds are merged into other funds, their track records are “lost” or disappear into the funds they are being merged into, while the track record of the existing fund remains. This results in survivorship bias, or the tendency of poorly performing funds to be excluded from studies due to the fact that they simply no longer exist, having been merged out of existence.
Once a merger is finalized, investors may face important changes, including new sales charges, fees and expenses, taxes owed on distributions, age and size of the new fund, risk and volatility, or changes in the fund’s operations, i.e., a change in manager, or to investment strategy and style. Any one of these could call for a reevaluation of the fund on the part of investors.
In 2004 alone, 479 mutual fund share classes merged into other existing funds. This figure is down from 2003, (781 mergers), and 2002 (714 mergers), but high by historical standards over the last ten years. Both 2002 and 2003 were greatly affected by the implosion of aggressive growth and emerging growth funds after the dot-com bubble burst. Many, such as Merrill Lynch Internet Strategies, were merged out of existence. More recently, fund management companies themselves are merging due to a saturated market, increased costs, and stricter regulations.