Price's sale may not benefit investors

Mutual funds

July 14, 1996|By Jerry Morgan | Jerry Morgan,NEWSDAY

Is the sale of Michael Price's Mutual Series funds to Franklin Resources a good deal for the funds' shareholders, other than Price?

We know it is a good deal for him. He stands to make $800 million or more from Franklin Resources, which owns the Franklin/Templeton funds and is buying his $17 billion Mutual Series funds: Mutual Beacon, Discovery, Shares, Qualified and the newly minted European fund, which opened Friday.

Mutual Series shareholders and the funds' directors still have to approve the sale, but industry experts say it is rare for such a merger not to be approved.

While some analysts believe that the companies fit well, others are not so sure the deal is a good one for Mutual Series investors.

Morningstar analyst Russell Kinnel said the move was good for ** Franklin because the company was missing the kind of large growth and income funds Price had.

"That is important when you want to get into 401(k) plans," Kinnel said, and Price had been shopping the funds for a while.

But Sheldon Jacobs, editor of the No-Load Fund Investor, is not so sure it is a good deal for Price investors.

"My feeling is that they won't notice anything for the first couple of years. When the brokers get it and they start selling -- they are going to be attractive funds on the load side -- that $17 billion will double and at that point, I don't think they are going to be the same," he said.

"Price invests in mergers, bankruptcies, distressed deals, and there is a finite amount of those out there," Jacobs said. "I am amazed they do as well as they do at $17 billion; I think a few more years down the road and they won't be above average," he said.

"Certainly, Franklin has a good sales machine," said A. Michael Lipper, head of Lipper Analytical Services Inc., which tracks the fund industry. "It depends on how fast the money comes in. I think they can handle double, but can they handle more in a short period of time?"

Price isn't concerned. "I don't think we are going to be hit with billions flowing in, but we have 15 percent in cash now, looking for the market to drop so we can pick up some good values," he said. "We've had a lot of cash come in before and we could get it out, but we are comfortable with cash."

Price, who will continue to manage the funds, certainly has a major reason to make sure he can handle all the money and perform as well as in the past.

The funds will have not only his guidance for five years, but also a chunk of his cash. Under terms of the agreement, he initially has to put $150 million of the $550 million he receives back in the funds, and he must keep $100 million in for at least five years.

"I am committing that money to my funds and I am going to be focused on it doing well," Price said. (He also gets 1.1 million shares of Franklin stock, which he can't sell for two years, and an incentive bonus of up to $192 million if the advisory fees Franklin receives meet growth targets.)

That's a big incentive for him to continue to seek the kind of returns he has been getting. In effect, the more the funds make, the higher the payment he gets for his company.

Price's three main funds, Beacon, Shares and Qualified -- all rated five stars by Morningstar -- have averaged better than 18 percent annual gains for the past five years, close to 15 percent for 10 years -- which includes the crash of 1987 and the recession of 1990 -- and between 14.4 percent and 17.9 percent for 15 years. The 3-year-old Discovery Fund has an average annualized return of more than 22 percent.

So Price has made a great mutual fund investment.

But what do ordinary fund shareholders stand to gain from the merger of a no-load fund group into a load group? Well, if they wish, they'll get a chance to buy Franklin/Templeton funds without a commission, though there are reasons they might not want to do so.

Under the terms of the agreement, those who own shares in Mutual Series funds before the sale is completed will be "grandfathered" in, and allowed to buy additional shares in those funds without a paying a commission for as long as they want.

Price said he expects that the "grandfather" period will attract more money to the funds even before Franklin starts selling.

After six months, Mutual Series shareholders will be able to exchange their shares for Franklin/Templeton funds, including Templeton's highly rated foreign funds, without paying a commission.

But a caution: Funds like to say you can exchange without paying sales loads, but the fact is that unless you own the shares in a tax-deferred retirement account, an exchange is just the sale of an old fund and the purchase of a new one, as far as

the Internal Revenue Service is concerned.

If you made money on shares you sold, you owe taxes on the profit. So it may be cheaper to pay the front load instead of the tax, especially if you have been a long-term investor.

Similarly, Franklin shareholders could buy Mutual Series shares now, while the funds are still no-load, be grandfathered into Price's highly rated and successful funds, and then exchange back into the Franklin/Templeton funds without a load, a convoluted way of doing business that may appeal to some shareholders in tax-deferred accounts.

Pub Date: 7/14/96

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