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 may be a sign of things to come, with management companies opting for less specialization and more economies of scale.
“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, while 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.”
What’s not being said here is that maybe this is proof that single-country funds 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.
The Polaris Global Value fund, managed by Bernie Horn, for example, has 10 percent of its holdings in emerging markets, so an investor who has 25 percent of their total assets in Polaris has 2.5 percent of their 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 they hold, they 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 now find that they have seen their investment in that country cut in half, simply by having their 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 forever altered.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
