Mergers & Liquidations
For investors who have thoughtfully crafted an asset allocation, a fund merger may be just as undesirable as a straight liquidation.
What happens when a mutual fund or ETF becomes obsolete? The most common and straightforward outcome is a liquidation in which the fund’s assets are sold and distributed to investors (with a potential tax bill!). Funds can also be merged. In this scenario, the fund’s assets are transferred to another fund from the same company, and the investor receives shares of the new fund. About 22% of fund closures over the past 10 years were mergers.1
Mergers share one trait with liquidations: They tend to be preceded by poor performance. And the rate of underperformance has been similar for both groups, with nearly two-thirds underperforming their category averages prior to their obsolete date.
Another drawback with fund mergers is the potential to end up with a radically different investment proposition than what you originally bought. That’s because there’s no rule dictating preservation of the investment objective in the merger. Exhibit 1 shows some examples of investment style transitions from mergers over the past 10 years.
EXHIBIT 1
Merging Doubts
Footnotes
1. This and all fund closure stats are based on data from Morningstar for the period January 2014–December 2023. Includes all US-domiciled mutual funds and ETFs.
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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
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