Liquidations Rise as New Funds Pace Abates
April 16, 2001
The number of funds that have been liquidated in the first quarter of this year is similar to that of last year, but the number of funds introduced in the same period last year far exceeded those introduced this year, according to a report released last week by Wiesenberger/Thomson Financial of Rockville, Md. Forty funds were liquidated in the first three months of 2001, compared to 35 a year ago, according to Wiesenberger. But while 255 funds were introduced in the first quarter of 2000, only 55 have been introduced this year. The most obvious reason is the declining market, which has further increased competition for assets among funds, according to the report.
"Even Wiesenberger's report on fund liquidations at the end of the third quarter attributed the rise to the fierce competition in the fund industry and not necessarily to the market's woes," the report said. "But today, with the market crash entering its 13th month, it would be too forgiving not to ascribe the liquidation mania to the bears."
That explanation would seem to be even more plausible when one considers how last year ended. A total of 225 liquidations occurred in 2000, outstripping the previous record set in 1998, when there were 222 liquidations, according to Wiesenberger.
Last year, Wiesenberger attributed the large number of liquidations to the previous bull market, saying it increased investor expectations and that investors were especially quick to drop funds that were not performing well. The recently-ended bull market continues to be an instigator of liquidations during this down market, according to Jim Folwell, an analyst with Cerulli Associates of Boston. The market upswing encouraged firms to introduce new funds, which increased competition, he said.
"In the 90s, we saw hundreds and hundreds of new funds introduced, far more funds than the U.S. fund industry probably needs or can sustain," said Folwell.
"Basically, people were bringing all kinds of growth funds, especially things like Internet and b2b funds," said Kunal Kapoor, senior fund analyst at Morningstar of Chicago. "I'm not going to be surprised if even more of them get merged out or just liquidated all together because they really weren't a viable investment strategy and clearly, after what we've been through, few investors are going to be willing to put money into such focused funds."
Although the market began to decline slightly over a year ago, some analysts suggest that it is still too early to pin the increased liquidations on the decline.
"I'm not so sure [the liquidations are due to the down market]," said Avi Nachmany, director of research at Strategic Insight of New York. "Everything that was done this year - approval, clearing, implementation - was set in motion a long time ago. I don't think it's a direct market effect.
"You have to assume there will be greater attention to cost and to what to do [with] small, unprofitable, under-performing portfolios, so this is an issue that will be much more on people's mind. But I would look at this more as a future theme, not necessarily something that you can really document based on the last couple of months."
Since 2000, no technology funds have been liquidated, according to Wiesenberger. Considering the huge amounts of assets this category of funds accumulated during the previous bull market, this is not very surprising, according to analysts. But, it is likely to change they say.
"I think it's a little early for [the liquidation of technology funds]," said Kapoor. "I would not be surprised if, by the end of the year, you see that starting to happen. I don't think it's going to sweep the broader technology funds per se because tech is a sector that's clearly here to stay and most firms are going to want to keep a tech fund. But, I'm pretty certain it's going to hit the more focused ones."
The international fund category has had the largest number of liquidations - 43 - since the beginning of 2000, according to Wiesenberger. That is not surprising considering the high correlation between the U.S. and international markets, according to the report. But, there are a number of reasons separate from the domestic downturn that account for it, the report said.
"The lack of strong political reform, failure of capital restructuring and illiquidity were some of the forces that weighed heavily on these markets," according to Wiesenberger. "Poor returns coupled with sizable asset outflows forced many of these once high-flying funds out of the game."
Another reason for the large number of international fund liquidations is that a lot of smaller fund firms which introduced international funds after they performed so well in 1999, did not have the expertise required to run international funds, according to Kapoor. Investors tended to stay with the bigger firms for their foreign holdings so many of the others did not attract enough assets and had to liquidate or merge funds, he said.
"I actually think that's a good thing because the bigger shops are really the better ones when it comes to handling overseas investments," said Kapoor. "They have more resources to throw at them, whereas some of these smaller shops never really built up their international operations and yet chose to go ahead with them anyway."
Firms of all sizes, however, were hit by liquidations, according to the report. Dreyfus Corporation of New York led all firms with 23 liquidations since the start of 2000, according to Wiesenberger. Aetna Investment Management of Hartford, Conn. was next with 16.