The Great Fund Disappearing Act

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Magician David Copperfield made the Statue of Liberty disappear, but even he might be envious of the neat trick some mutual fund companies have recently accomplished: making poor-performing mutual funds – and their records – vanish.

Fund companies have been pulling off a slew of “fund mergers,” which involves taking a badly performing fund and collapsing it into one that’s doing better. The move usually requires a vote from owners of the fund to be merged, but analysts say shareholders rarely participate in such things, so the merger usually sails through.

Morningstar and other fund-rating outfits track the surviving fund; the old fund’s record disappears from the rating firms’ Web sites. More than 150 funds were merged out of existence from January through September 2009, nearly 40 percent more than in the same period in 2008, according to data from Morningstar.

Analysts say a common reason for a fund merger is to eliminate a poorly performing fund. Many funds lost so much money in 2008 that it could take years to burnish their performance records, says Jeff Tjornehoj, a senior research analyst at fund researcher Lipper. “It’s a way to bury the last 10 years,” he says. Another reason: Funds have become too small.

For many firms, funds need at least $100 million in assets to make money. Pioneer Investments combined a total of 22 funds in a series of recent moves. Many of the funds were small, and the changes should keep all its funds “economically viable,” says Pioneer spokesman Geoffrey Smith.
But some moves have combined funds with different investment objectives. In February, ING merged its Financial Services Fund, which had the majority of its assets in financial stocks, into the larger ING Growth and Income Fund.

Less than 14 percent of the combined fund is invested in financial stocks.
ING spokeswoman Dana Ripley says the firm merged these funds because they had “similar or compatible investment strategies.”

Experts say if investors find themselves in a merged fund, they should read the prospectus of the new fund and, if they don’t like its strategy, cash out. Russel Kinnel, Morningstar’s director of fund research, says there could be a benefit to the mergers: Funds with bad managers might be folded into funds with better stock pickers.

2010 Copyright The New York Times Syndicate