Following is the third and final excerpt from Chapter 6 of the BetterInvesting Mutual Fund Handbook, written by Amy Buttell and recently revised by Danielle Schultz:
Fund Closings and Mergers
The performance gap between index funds and most actively managed funds may actually be larger than research shows, given that many of the least successful funds are no longer in business. By closing or merging their least successful funds out of existence, fund companies skew the statistics of actively managed funds, leaving just the records of the most successful to stand against index funds.
Funds in unpopular sectors, those with poor performance records, and funds with assets of less than $60 million are likely candidates for merger or closure. Fund companies seeking to merge funds into other funds aren’t doing the shareholders of the original funds any favors in most cases. Frequently, funds are merged into other funds with dissimilar objectives.
For example, in 2002 Dreyfus asked shareholders of the Dreyfus Premier Small Company Stock Fund to approve a merger into the MPAM Mid-Cap Stock Fund. Shareholders who originally purchased this fund for its small-cap focus would receive shares in a mid-cap fund, which is a major change in investment focus.
With the proliferation of ETFs, we’ll also see some (especially those with narrow strategies or that follow specific sectors) close for lack of size or poor performance. Again, it’s important to check the asset base; ETFs with less than $50 million in investments may not be viable.
About the ‘Mutual Fund Handbook’
The Mutual Fund Handbook, originally written by Amy Buttell, is $15 for BetterInvesting members ($20 for nonmembers) via the BetterInvesting online store. To get your copy, click here. Or download a free sample chapter of the Mutual Fund Handbook and also try out BetterInvesting’s free mutual fund resources.
About Danielle Schultz
Learn more about Danielle Schultz and read her blog.
About BetterInvesting
BetterInvesting is a national nonprofit organization that has been empowering individual investors since 1951. Founded in Detroit, the association (formerly known as National Association of Investors Corporation) was born out of the conviction that anyone can become a successful long-term investor by following commonsense investing practices. BetterInvesting has helped more than 5 million people become better, more informed investors by providing webinars, in-person events, easy-to-use online tools for analyzing stocks and mutual funds, a monthly magazine and a community of volunteers and like-minded investors. For more information about BetterInvesting, visit its website at http://www.betterinvesting.org/investing/landing/openhouse/blog/index.html or call toll free (877) 275-6242.
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