When your favorite fund goes 'poof'
NEW YORK — A few days can make a big difference in the mutual-fund world - and not only in terms of returns. Funds have been known to vanish.
Just a few weeks ago, Fidelity investors could flip to the financial pages and check out the returns of the Fidelity International Value Fund, which has been a solid performer over time.
But try doing that now and you'll discover that the fund is no longer listed. Instead, it has become the Fidelity Aggressive International Fund. While the fund's portfolio and management remains the same, the name has been changed.
Reason? "Having the word 'value' in a fund these days works against getting net new inflows, since value is so out of favor," says one fund analyst.
What happened at Fidelity is hardly unique. Last year, some 430 funds were merged into other funds, according to Chicago-based information firm Morningstar Inc. Another 190 funds simply disappeared - that is, they were liquidated.
In the period between early 1994 and the end of 1999, some 2,038 funds were merged; and 1,101 funds hit the garbage can, Morningstar data shows.
Perhaps a quarter to a third of all equity funds have disappeared through mergers, takeovers, or liquidations since the 1950s. Such activity has helped overall mutual-fund returns look stronger over time, analysts say, since funds that would have held those numbers down ceased to exist.
Funds are merged or eradicated for a number of reasons. "Sometimes fund companies just want to hide low-performing funds," says Lawrence Solomon, chief statistical analyst for the No-Load Fund Investor, a news-letter published in Irvington-on-Hudson, N.Y. "Sometimes it is because assets have gotten too small ... and thus the funds are too expensive to service."
Earlier this month, Scudder Kemper Investments announced that it will merge or close some 40 percent of its retail (direct sale) funds. The goal, the firm said, is to reduce its directly sold funds from 77 funds to 43 funds. Some $35 billion of shareholder monies in Scudder and AARP funds (managed by Scudder) will be affected.
In the process, some low-performance numbers will likely disappear, to be replaced by higher numbers. Scudder, for example, is moving its GNMA fund into the AARP GiniMae fund, which has a better performance record.
But that's only Step 1.
Step 2: The name of the revamped AARP fund is being changed - back to the Scudder GNMA fund. Voila! The Scudder GNMA fund will have a much better track record than it had just a few months ago, Mr. Solomon says.
Are such changes legal? Usually. Sometimes federal regulators will throw up a red flag when fund companies propose unusual shifts. But usually the US Securities and Exchange Commission only requires that, in the case of mergers, a surviving fund post its performance record.
Some fund companies merge funds more than others: Dreyfus, for example, has been a major shifter of funds over the years, usually by merging laggards into better-performing funds.
If one of your funds has been merged into another fund, you have three options, says Russel Kinnel, equity editor for Morningstar: 1. "Stay put" and enjoy the new ride. 2. Ask to shift your assets into another fund in your same fund group. 3. Shift your assets to another fund in another fund company.
If you take routes 2 or 3, remember that unless your money is in a tax-sheltered account, such as a 401(k) or an IRA, and is directly rolled over to another tax-sheltered account, you could face a big tax bill.
Finally, if your fund is liquidated, there is not much that you can do, experts say. You will be sent a check and deal with potential capital-gains taxes.
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