Mergers and management
NEW YORK – The largest mutual fund merger in history was completed last month, the result of J.P. Morgan Chase & Co.’s $58 billion purchase of Bank One Corp., and analysts say more consolidation is likely in the financial sector. But what do such mergers mean for fund shareholders?
Experts say a fund merger isn’t necessarily a sell signal for investors. Ideally, such combinations would benefit them because the merged entity would have an opportunity to do several things for their benefit, such as shedding unprofitable funds and generating cost savings through economies of scale. But those things don’t always happen, said Todd Trubey, an analyst with fund tracker Morningstar Inc.
“What we have tended to see is that fund families often don’t get rid of their poor funds, and they also don’t tend to pass down savings to investors,” Trubey said.
It may be too soon to say how well the Feb. 22 combination of the former JPMorgan and One Group funds will serve investors. The newly formed JP Morgan Funds is the fifth largest U.S. fund family, with more than $208 billion in assets under management and a lineup of 101 distinct portfolios. Some of its research operations have been consolidated in New York, but it’s unclear whether cost savings will be passed on to shareholders.
Another recent deal, Bank of America Corp.’s $47 billion acquisition of FleetBoston Financial Corp., created one of the biggest mutual fund lineups in the business, with 114 distinct portfolios and more than $201 billion in assets. Analysts initially eyed the combination of FleetBoston’s Columbia Funds and Bank of America’s Nations Funds with skepticism, as both firms were involved in last year’s market timing scandal, and neither was particularly known for being a low-cost provider.
But it appears the newly formed firm is beginning to take small steps in the right direction on behalf of investors, Trubey said. It has closed five funds and is likely to eliminate about a dozen others through consolidation if current proposals are approved by shareholders. It also appears to be cutting fees.
“Some of that is because of a settlement they made related to the fund trading scandal,” Trubey noted. “Still, cutting costs, for whatever reason, is a good thing. … I would say that we’ve been, at the margins, pleasantly surprised, because we were nervous that they would do all the wrong things, and they have certainly done some things correctly. They’ve just started, but it seems they’re on the right track.”
Anytime a fund sponsor is involved in a merger, investors should be alert to changes in the funds they hold, including shifts in investment strategy or style, and rising expenses. But the most important detail by far is who is running the fund – particularly if it’s an actively managed portfolio. Companies often merge funds as they streamline their product lines, and while you hope your fund will get the most talented manager available, there’s no guarantee that will happen. If new management is assigned, you need to reassess your options.
“If your fund is being merged into another and your guy has been fired or whatever, you have to evaluate that fund from scratch and make sure it still fits in with your portfolio,” said Neil Donahoe, chief investment officer of SYM Financial Advisors, a wealth management firm based in Warsaw, Ind. “The track record is essentially useless at that point. It’s like starting over.”