What should investors do when their funds are on the verge of a merge?
Berger Funds is likely to be absorbed by Janus. Will shareholders go along for the ride, or get out?
Some time in the weeks ahead, an entire mutual-fund group will disappear and assume a new identity.Skip to next paragraph
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The Berger Funds, a fund family owned by Stilwell Financial, will likely fade into oblivion - as have scores of other mutual-fund companies in the past several years.
The company was founded by well-known mutual-fund guru William Berger, back in 1974. But in 1994 Berger sold his company to Kansas City Southern railroad, which also owned Berger's geographical arch rival, Janus funds.
Both companies were located in Denver. Janus was big and growth oriented, Berger, small, leaner. The railroad tucked both funds into the Stilwell Financial apparatus.
Stilwell now wants to consolidate to save money. In other words, "hasta la vista, Berger!"
Trustees for Berger funds have been weighing various options. The possibilities include selling the fund group to another mutual-fund family, keeping it independent, or letting it be absorbed by Janus.
Berger's trustees have reportedly decided to let Janus take over Berger's 26 funds as well as the company's international portfolios. Any such move, however, will have to be approved by Berger shareholders, which will extend the process into 2003.
Whatever the decision, it appears evident that the independent Berger brand name is history.
The drama at Berger is a case study in what is happening within the entire multitrillion-dollar US mutual-fund industry, as funds seek to cut costs and modernize in the wake of severe market losses and continued turbulence.
Since the onset of the bear market in early 2000, just under 700 funds have bitten the dust, according to financial information firm Morningstar Inc. in Chicago. Another 1,000 or so have been merged into other funds.
Morningstar analysts believe this is the most intense period for consolidation of funds since the company began keeping its merger database several decades back.
In addition, many other funds are consolidating administrative services, in effect, curbing distinctions between different fund groups held under a common ownership.
In just the past several months, for example, FleetBoston has announced consolidation of the administrative duties of several of its funds, including Columbia funds, Liberty funds, and Galaxy funds.
For investors, the issues arising out of mergers and consolidations can be significant. The key question: Do you accept having your assets shifted into a new fund that is chosen for you, or do you withdraw your assets and invest them elsewhere?
New fees and charges should influence such a decision. Columbia funds, for example, recently converted from no-load (no commission fee) to load status. While some investors may wish to leave that fund, most may wish to stay put since current fund-holders do not have to pay the new sales commissions; only new fund holders do.
And then there is the matter of managers: Do you stay if your fund is merged or moved and suddenly has a new management team?
Studies over the years suggest that new managers almost always lead to a different investment approach. In many cases, this new direction may run counter to the reasons for which a person originally invested in the fund.
Over the years, there have been many large-scale consolidations, some working out better than others. Some analysts believe the most famous successful merger is that of the Franklin-Templeton Funds in 1992. That merger in fact became a triangle, as the group also absorbed the Mutual Series funds in the mid-1990s, which have continued under their own name.
But does it really matter what company owns your mutual fund?
Not necessarily, says Sheldon Jacobs, who publishes the No-Load Fund Investor, a newsletter. The key to a mutual fund or a group of funds, he says, is successful management.
Mr. Jacobs sees no need for investors in Berger to rush to redeem shares. He suggests they wait and see what the trustees propose, and sell only if there are urgent reasons to do so.
At the same time, Jacobs says, investors must also weigh the tax consequences.
If they hold a taxable account, they may want to sell if they can take a tax loss. If they have made large profits, they may want to defer selling until the next tax year - and perhaps not sell at all. If the fund is tax sheltered, the issue is moot: They can sell or stay put without tax consequences, Jacobs says. (For a look at other year-end tax moves, see story.)
Josie Raney, who tracks Berger funds for Morningstar, is not so convinced that a person should stay put when a fund changes hands or merges.
Berger offers both value and growth funds, she notes. The value funds, which have been widely expected to shift over to Janus, have done fairly well the past year.
But the growth funds have sagged, reflecting the tough time that growth stocks have been having of late across the board.
Ms. Raney recommends getting out of Berger's growth funds, if it can be done without adverse tax consequences. Berger's growth fund managers, she says, "have not done a good job of protecting investors."
If the funds do disappear - regardless of whether they are absorbed into other funds or another company - Raney will not be disappointed.
"It will mean fewer poor choices for investors," she says.