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Companies Step Up Pace of Fund Mergers

Mutual fund companies increasingly are merging out of existence small funds that cost too much to run and have shown little evidence they will grow.

Fund companies historically have eliminated funds when two mutual fund advisers merged, creating two nearly identical funds, or when a fund's performance consistently was below average. Now, however, industry executives and consultants say that fund companies have become more aggressive in closing funds whose asset growth has stalled, often at less than $100 million.

Fund companies cap the fees of new funds and subsidize their expenses. That expense reduction helps improve a fund's investment performance, a key to sales. When assets increase sufficiently, fund companies drop the subsidies and reduce fees.

In the past year, however, fund companies have shown an increased willingness to cut their losses and ask shareholders to merge small funds whose prospects look limited, fund industry executives say and statistics suggest.

"Most fund companies are much more conscious of what their costs are," said Robert S. Brennan, vice president of Shareholder Communications Corp. of New York. Brennan, whose firm works for mutual fund companies on shareholder proxy campaigns, said the rate of fund mergers has increased "significantly" in the past year.

Data on the number of mergers from Lipper Analytical Services, the fund research firm in Summit, N.J., confirm that assessment. There were 155 fund mergers in 1996, according to Lipper. That number decreased to 129 mergers in 1997. Last year, there were 387 fund mergers, according to Lipper.

Executives in recent interviews said repeatedly that managing mutual funds remains a profitable business and mergers in a fund complex are not a sign of hard times for the business. Nevertheless, fund companies are taking steps to eliminate smaller funds both to reduce funds with similar investment objectives - thereby simplifying sales efforts - and to protect profit margins, executives and consultants said.

"The amount of new money flowing into the industry has dropped precipitously," said Burton Greenwald, a mutual fund consultant in Philadelphia. "A lot of fund groups are struggling to maintain margins."

Several fund companies have fund merger proposals before shareholders now, with votes expected this spring and summer. They include:

* Invesco Funds Group of Denver, which is asking shareholders to merge eight and liquidate three of its 41 funds. If shareholders approve the moves, Invesco will decrease its funds by roughly 25 percent. The 11 merged and liquidated funds, however, represent a total of only about $200 million of the firm's $26 billion in assets, said Collen Noth, an Invesco spokesperson.

* Putnam Investments of Boston, which has proposed merging two of its bond funds, the $373 million High Quality Bond Fund and the $112 million High Yield Total Return Fund, into the $1.5 billion American Government Income Fund and the $1.3 billion High Yield Trust II. If shareholders approve, the mergers will be the first for an open-end fund at Putnam since May, 1996, said Matthew Keenan, a Putnam spokesperson.

* Lexington Funds of Saddle Brook, N.J., which has proposed merging its $17.5 million Strategic Investments Fund into the nearly $51 million Goldfund, a fund with a similar investment objective and lower expense ratio, according to a proxy statement filed with the SEC April 15.

* Evergreen Funds of Charlotte, N.C., is asking shareholders to approve the merger of seven funds, four of which have less than $50 million in assets under management, said Chad Peterson, an Evergreen spokesperson.

While Evergreen always scrutinizes its product line, the latest changes are part of "a concerted effort to make our mutual fund operation more efficient," Peterson said.

"Lack of investor demand results in a lack of asset growth," Peterson said. "It just makes sense to merge these into larger funds."

As many mergers as there have been, there may be many more to come. Strategic Insight, a mutual fund research and consulting firm in New York, estimates that there are approximately 3,000 funds with assets of $100 million or less. Roughly 2,000 of those funds are at least two years old, said Avi Nachmany, director of research at Strategic Insight.

The $100 million asset level is the point at which funds tend to become profitable for a fund adviser, Nachmany said. The rate of mergers is likely to continue given the number of funds that have been unable to break through the $100 million barrier after two years of doing business, Nachmany said.

That is a relatively common view among executives and consultants.

"There are a lot of inefficient sized funds that have limited marketing prospects in the immediate future," Greenwald said.

Executives say that mergers help shareholders as well as their companies. The smaller funds which are merged frequently have a narrow investment objective which can be out of favor. Mergers frequently put shareholders in a fund where portfolio managers have more latitude in selecting investments, a fact fund companies often cite in proxy statements supporting proposed mergers. The broader investment objective can improve performance.

Mergers also provide fund companies with a simpler marketing task by reducing the number of similar funds, executives said. Investors ultimately have fewer products to sort through before investing, executives said. And the mergers hold out the possibility that, with more assets in a fund, investors will benefit from fee reductions.

Fund mergers "make it easier on the fund company and the shareholders," said Invesco's Noth.