Fund liquidations, mergers on rise

The market’s decline is taking its toll on mutual funds.

Through the end of June, 292 mutual funds were liquidated, compared with 144 in the first half of 2008 and 411 for the full year, according to Lipper Inc. of New York.

In addition, there were 199 fund mergers in the first half, compared with 190 a year earlier and 322 mergers for the year, Lipper said.

“The financial crisis and profitability are probably the issues this year,” said Tom Roseen, a Denver-based senior research analyst with Lipper. “You see a bigger increase in mergers [and liquidations] when you have a bigger shakeout in the market.”

Small-cap core and small-cap growth were the categories that saw the greatest number of liquidations in the first half, followed by multicap core, mid-cap growth and European funds. So far this year, 34 small-cap funds were liquidated.

Last year, the greatest number of liquidations occurred in the multicap-core, multicap-value, small-cap-core, large-cap-growth and small- cap-growth categories.

The level of merger and liquidation activity in the second half will depend on market performance, Mr. Roseen said.

Year-to-date through June 30, mutual fund assets rose by 8%, compared with a decline of 19% last year, according to Chicago-based Morningstar Inc.

“Given the record number of new funds that have come to market over the past 10 years, we are seeing a bit of survival of the fittest in this environment,” said Mark Berg, president of Timothy Financial Counsel Inc. of Wheaton, Ill., a fee-based advisory business that doesn’t manage assets.

To be sure, there are many reasons for fund mergers: Some can’t gain traction with advisers, others fail to attract enough assets to be profitable and others may have been too narrowly focused.

For instance, an unprofitable fund that specializes in Malaysian companies may be merged with a Pacific region fund offered by the same fund company, Mr. Roseen said.

“Mutual funds are also feeling the pressure from lower-cost ex-change traded funds and the market in general,” said Tom Orecchio, principal at Modera Wealth Management of Old Tappan, N.J., which manages $400 million in assets. “That could be forcing them to consolidate and reduce costs.”

Advisers are monitoring funds, hoping to avoid those that are vulnerable to being merged or closed.

“We won’t invest with a fund until we feel it is in a strong-enough position, and has gathered enough assets, so that it won’t be merged or sold,” said Kathleen Hartman, founder of Greenleaf Financial Group LLC of Indianapolis, which has $14 million in assets under management.

As a result, she prefers mutual funds with $100 million in assets ($50 million for a small-cap fund).

Still, fund liquidations can be a problem if it means fewer choices, said Mr. Berg, who is a director of the National Association of Personal Financial Advisors of Arlington Heights, Ill.

To mitigate the impact of asset losses, he thinks that funds may raise fees or adjust investment strategies.

E-mail Sue Asci at [email protected].