Mutual-fund firms shuffle the deck and merge funds out of existence all the time.
But when Columbia Management announced last week that it would fold 11 funds into eight of its other offerings, it showcased the entire range of scenarios – from best to worst – that investors can see when management deals new cards. If any of your funds ever goes through a merger, the Columbia situation has a case study for you.
First, some background. Columbia Management is the fund arm of Bank of America, running more than $361 billion in 90 funds. At the end of 2004, the firm – which was running the Nations, Galaxy and Columbia brand names – began a series of mergers to streamline operations, passing along operational savings to shareholders in the form of lower expense ratios.
The 11 new mergers are the next step in streamlining. The deals require approval only from shareholders of the funds being killed off; investors in the acquiring funds have no say.
Most of Columbia’s deals raise concerns common to fund mergers:
Columbia Utilities is being folded into Columbia Dividend Income, combining a sector fund with a generic growth fund. For a true utilities investor, that’s a problem, especially because an analysis using Overlap software shows that the two funds share just 6 percent of their holdings.
Said Columbia spokesman Tom Gariepy: “Many Utilities shareholders bought the fund seeking income-producing securities, as opposed to wanting a fund that invests totally in utilities. … Now they will have a fund that still produces income but that is more diversified.”
That’s fine, so long as it’s what the investor wants. And while expenses in this merged fund will be down, that is only because of a fee waiver, a perk that isn’t guaranteed to last more than a year from the consummation of the merger.
Columbia Young Investor is merging with Columbia Strategic Investor. Morningstar pegs Young Investor as a large-cap blend fund, while Strategic is a mid-cap fund. Moreover, many shareholders in Young Investor got in hoping for the additional educational materials that once helped teach newbies how to invest. For a few years, those goodies have been available only at the firm’s website; they will still be there, but when the fund no longer pursues the same goals it had when first purchased, it’s time to consider a change.
Columbia Tax-Managed Growth is one of two issues being folded into Columbia Large Cap Growth, raising questions about whether shareholders will get what they paid for. Both funds share a management team, but the surviving fund – depending on which share class you look at – gets poor marks from Lipper for tax efficiency.
Columbia Small Company Equity will merge with Columbia Small Cap Growth II, creating a fund with about $650 million in assets. The funds have significant overlap and mostly share the same management team, so the real concern is the size of the combined fund. Small-cap funds that get too big tend to drift toward larger stocks, which isn’t good for shareholders. Few industry watchers would suggest the merged fund is too big now, but it’s a lot closer to the danger zone than either fund was before.
Columbia Marsico Mid Cap Growth is merging with Columbia Mid Cap Growth. It’s the third manager for the Marsico fund in three years; none of those managers actually is famed growth investor Tom Marsico, which is good because anyone buying a fund to get a star manager should get upset when the main attraction is gone. Investors who stick around will get a good fee cut.
Columbia Florida Intermediate Muni and Columbia Texas Intermediate Muni are folding into Columbia Intermediate Muni. Both Texas and Florida have no state income tax, so a single- state muni fund makes little or no sense in those states. While Columbia had almost $500 million in the funds, investors clearly are better served by funds that can choose investments from across the entire country.
“Any merger should make you re-evaluate your fund to make sure its mission and holdings haven’t changed,” said Gregg Brewer, director of mutual-fund resources at Value Line. “Some deals are good, others bad, and it will depend on the funds involved and your situation as an investor.”
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
