Until they receive notice, many investors don’t realize the frequency at which mutual funds close their doors. Fund mergers and liquidations aren’t uncommon. Of 5,108 funds examined in a recent Morningstar research report, only 54% survived the past 15 years. The rest were either liquidated or merged and ceased to exist.
Funds close for a number of reasons. Sometimes it’s poor performance and a lack of interest from investors; in other cases, it could be a strategic merger to become a part of a better-performing fund. In any case, financial advisers say investors should carefully examine the merger or closing and consider their options before deciding to sell or stay the course.
The 2013 Vanguard report “The Mutual Fund Graveyard: An Analysis of Dead Funds” identified the performance of 2,364 mutual funds closed over the 15 years leading up to Dec. 31, 2011. The report found the primary factors leading up to fund closure were poor performance and a lack of commercial success. Although the report used the term “dead,” most of these funds didn’t literally shut down but were merged into other funds.
When the provider closed such funds, they have been traditionally eliminated from Morningstar performance databases. This implies that past performance evaluations using fund category averages are often biased upward. The report indicated that not accounting for closed funds can lead to false perception of the probability of success.
Chris Philips, senior analyst at Vanguard Investment Strategy Group, says a fund closure can take many forms and happen for a number of reasons. It can often depend on the organization’s corporate structure. Sometimes it’s the departure of a manager; other times, style drift may result in a company having two or more funds so similar they end up merging. Philips says small funds that “bleed” assets may often merge into other funds that are larger or more sustainable. Sometimes a fund company may eliminate or merge a poorly performing fund simply to try to hide a sore spot on their record.
“There are various reasons why [mergers and liquidations] occur,” Philips says. “I think the biggest reasons would be performance and then the cost factor when investors aren’t attracted to that fund.”
In any case, a mutual fund closing its doors shouldn’t instantly be taken as a sign of trouble, says Diane Pearson, personal chief financial officer with Legend Financial Advisors in Pittsburgh. In many cases, shareholders can benefit because their floundering shares of a fund are merged into shares of a better-performing one. Mergers are often strategic moves that can result in better outcomes for the fund and its investors.
“[Merging or liquidating] isn’t necessarily a bad thing,” she says. “Many of the mergers we’ve seen lately are so the fund will get access to deeper pockets, more marketing opportunities and more money coming in.”