Unusual Fund Mergers at Fidelity

April 15, 2007

One of the dirty little tricks of the fund industry is when fund companies merge the assets of mutual funds with poor performance records into better performing funds. Fund companies know that most investors make investment decisions based on past performance, and that lousy performers are unlikely to be marketable. Merging allows fund companies remove the lousy fund from their roster while keeping investor's money in the family. But Chuck Jaffe reports on recent fund mergers at Fidelity which are unusual because the funds being merged are all top performers:

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 last 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. Investors may also take it as a sign that there's little reason to go for extreme niche offerings."

This could be an acknowledgment that super-targeted funds are under increasing competitive pressure from lower fee (and tradable) ETFs (exchange traded funds).

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