By merging funds, managers can alter balance of portfolio

Your Funds

Your Money

April 17, 2007|By Charles Jaffe | Charles Jaffe,Marketwatch

The mutual fund industry is a survival-of-the-fittest world where management companies frequently kill off their weakest offspring by merging them into their best and healthiest issues.

So when one of the industry's biggest players announces plans to merge two issues into sister funds, it's no big deal.

Unless the funds have an annualized average return of more than 21 percent over the past five years, are leaders in their respective asset categories and are being merged into funds with slightly lesser results and different investment objectives.

And that's precisely what Fidelity Investments is doing in its recently announced decisions to merge Fidelity Nordic (FNORX) into Fidelity Europe (FIEUX) and Fidelity Advisor Korea (FAKAX) into Fidelity Advisor Emerging Asia (FEAAX).

The move is interesting for investors because observers believe it might be a sign of things to come, with management companies opting for less specialization and more economies of scale. Investors might also take it as a sign that there's little reason to go for extreme niche offerings.

"The underlying message is that more diversification is the way to go and that a lot of the things you see in specialty funds you can also find in broader funds," says Steven Howard, a partner at Thacher, Proffitt who focuses his practice on mergers and mutual funds. "We will see more of this; in the next few months, you will see other large financial groups and holding companies making strategic moves."

In any fund merger, there are several issues for shareholders.

Nordic has $621 million in assets and Advisor Korea has $55 million, so both were big enough to be profitable, but not so huge that they mattered much to a behemoth like Fidelity.

Investors will get funds with slightly lesser track records in the $4.44 billion Europe fund and the $187 million Advisor Emerging Asia fund. More important than the track record, however, is that an investor who picked the single-country funds for a specific reason will now own a fund that does something different.

Fidelity officials have said that the Korea fund had limited appeal, while Nordic shareholders are getting "a larger, more diversified fund with a less volatile market history."

That sounds good unless you bought the funds wanting that single-country exposure and accepting the volatility.

What's not being said here is that maybe this is proof that single-country funds - long scorned for their volatility by analysts at firms such as Morningstar and Lipper - are an anachronism in an economy that is undeniably global in nature.

A decade ago, an investor wanting to pursue the high-risk, high-reward strategy of investing in emerging markets needed to find a specialty fund to get the job done. Today, it's hard to look at a fund that is leading the performance pack in the global or international categories that does not have at least 10 percent of its portfolio in emerging markets.

Investors have more to fear about being overloaded in those areas. Where they might once have committed 5 percent or 10 percent of a portfolio to that specialty market, they now have ordinary mutual funds making that allocation already; adding a specialty fund can sometimes leave a portfolio overweight.

In a recent radio interview, Mark Headley, president of the Matthews Asian funds, described how he once was a lonely explorer in developing markets but now is finding competition from people "running every kind of fund you can imagine."

Bernie Horn, manager of the Polaris Global Value fund, says that investors "need to be aware of where their fund management is going, because managers are going everywhere. So you hear something that sounds like a good idea, and you want to get a little bit of it ... but the funds you own already have that little bit of it."

The result is that investors deciding that they want to pursue a single-country fund or a niche offering must first examine the portfolios of the issues they already own.

Horn's fund, for example, has 10 percent of its holdings in emerging markets, so an investor who has 25 percent of total assets in Polaris has 2.5 percent of those dollars invested in developing nations just by owning the fund. If that investor decided to build a 5 percent position in emerging markets without knowing the underlying assets in the funds held, that investor could easily end up overweighted in a risky, volatile asset class.

And investors in the funds being merged must also do that analysis, if only to be sure that they are satisfied with their modified portfolio. An investor in Fidelity Korea, for example, will find that he has seen his investment in that country cut in half, simply by having his money mixed into the more-diversified Emerging Asia fund.

It may not be enough to warrant big portfolio changes, but even in the smallest of fund combinations, shareholders' portfolios are altered.

Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.