In 2004, 479 US mutual fund share classes merged into other funds, which is lower than 2003 (781) and 2002 (714), according to a press release from the research, ratings, and indices firm. While many funds simply merged out of existence, S&P noted that more recent activity in the area was caused largely by a saturated market, increased costs and stricter regulations.
S&P attributes the high activity in 2003 and 2002 to the implosion of aggressive growth and emerging growth funds after the collapse of tech stocks.
Looking at the performance of merging funds, S&P shows that the acquiring fund’s 2003 average returns were 24.2%, slightly hired than the 22.6% for the merged funds. Fifty-five percent of acquiring funds outperformed the merging funds over this time period. Returns for 2004 could not be given because of the lack of track record and subsequent mergers.
By fund family, TA IDEX funds had the most number of mergers. According to the company, 70% of the mergers were approved in an effort to reduce expenses, which can be done by merging a fund with a higher expense ratio with a fund that has a lower ratio.
By investment style in 2003, small cap funds had the highest average returns of merging funds. For merged funds (those being acquired), the highest average return was for small cap value, with 40.1%; for acquiring funds, the highest average return was seen with small cap blend. The lowest returns were seen with large cap growth.