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Liquidations Could Set Record for Year


It is likely that more mutual funds will be liquidated this year than ever before, according to a study by Wiesenberger, Thomson Financial of Rockville, Md., a mutual fund tracking service. The record for the number of funds liquidated in one year, set in 1998, is 222. If the pace set so far this year is sustained, over 260 funds will be liquidated in 2000, according to the study. This assumes that as has occurred in the past ten years, over fifty percent of fund liquidations will occur in the last quarter of the year, according to the study. Wiesenberger is a division of Thomson Financial, the publisher of this newsletter.

As of Sept. 30, 175 funds had been liquidated this year.

The record liquidations stem from the prolonged bull market, according to Wiesenberger. Investor expectations are at an all-time high. As a result, funds that do not perform well are in danger of being dumped by investors.

"The way things have been going, tolerance to poor performing funds has become much lower," said Ramy Shaalan, a mutual fund analyst for Wiesenberger.

Because expectations are so high, investors are less likely to ride out periods of poor performance, said Shaalan. This is especially true at a time when performance data is becoming increasingly accessible and current, and transactions are becoming easier to make.

"It's pretty easy to figure out which fund leads a specific category and everybody below is not viewed as favorably," said Jim Folwell, a consultant with Cerulli Associates of Boston. "If your fund ranks 357th out of 800, you may be above average, but it may be difficult for you to draw in assets."

The study supports that notion.

"Financial Research Corporation [of Boston] reported earlier this year that 90% of fund assets are held by a mere 10% of funds," said the study. "With a wide selection of over 10,000 funds, investors put their confidence, and their money, into the ones that are top performers, and as FRC later reported, into funds from established fund families, such as Fidelity, Vanguard and Janus. With this unequal distribution of investors' money, and with investor's expectations at their highest levels, US funds that lag are quickly shunned and not given another chance. Nine consecutive years of bullish returns have reshaped the industry into a Darwinian model of Survival of the Fittest.'"

During the past decade, there has been an enormous increase in the number of liquidations. From 1990 to1994, the average number of liquidations was 29.2. That number jumped to 176.6 from 1995 to 1999. So the number of liquidations in 2000, although it could set the record, is not unprecedented.

The bullish market may have played another role insofar as it invited many new funds into the market and increased competition, said Folwell.

"In the 90s, we saw hundreds and hundreds of new funds introduced, far more funds than the US fund industry probably needs or can sustain," he said. "Fund families may be saying, We opened up a bunch of [fad] funds in the mid-90s. Now we need to get leaner and meaner and limit the distractions.'"

Another reason for the high liquidation count is the increase in emerging markets and international funds in 1998 after those categories did well in 1997.

"Many of these funds came to the market right as the Asian woes reached their peak all around the globe," said the study. "By the year 2000, these funds had mounted woeful losses and were hit with constant waves of redemption, which drained their asset bases even further. Between 1996 and present, over 100 liquidating funds came from these foreign categories."

The "consolidation spree," which began at the end of 1998 and accelerated this year, is also a reason for the increase, according to the study. In a consolidation, a firm will generally merge similar funds and possibly maintain some others that have a large enough asset base. Remaining incompatible funds will likely be liquidated. This year, nine have been liquidated for this reason, according to the study.

"It may be better for the industry that, in theory, only the strongest survive," said the study. "This process of natural selection serves as the decisive ruler making some funds dissolve while others evolve, and hopefully the end result is the best of breed."