Mutual fund mergers: what to look out for
Do you own mutual funds? If so, you should know what to do if your fund company changes ownership or your fund merges with another fund.
If that happens, it’s best to re-evaluate the fund. Look at it with fresh eyes and determine if it’s still a good fit for your portfolio. Below is a list of Do’s and Don’ts that investors should heed when their fund or fund company is involved in a merger:
Don’t assume the fund’s mandate will be the same
The fundamental investment objective of a fund cannot change without a unitholder vote. However, be aware of any changes to the mandate of your fund. For example:
- Has the investment philosophy changed?
- Has the investment strategy changed?
If your philosophy or strategy has changed, does the new mandate continue to suit your needs? When these changes are set to take place, fund companies should be sending you materials to review to understand the differences between your original mandate and the continuing mandate. In addition to these materials, you can read the fund prospectus so you’re confident that you know about the investment objectives and strategies of the continuing fund.
Find out who the portfolio manager will be
If there are any changes in portfolio managers, make sure their investment philosophy continues to align with your objectives. Pose the question: “Tell me about the manager.” Delve into their track record to ascertain their prior experience and their investment philosophy. Fund companies may make a portfolio manager change to bring the management of the assets in house. During these times it’s especially important to review the track record and investment philosophy of the new manager.
Be aware of any tax consequences that may arise as a result of the merger
Sometimes merging mutual funds can have substantial tax implications for investors. Read about the methodology of the merger and pay close attention to potential tax consequences the merger could have if you hold the mutual fund in a non-registered account. These consequences could include larger annual distributions, whether your fund is being merged into a larger fund or you hold the larger fund which is gaining assets by having a fund merged into it.
Look out for any changes in fees
Any change to fees would require a unitholder vote before it could come into force. Still, keep in mind that some funds charge performance fees. This is an additional payment made to the fund manager if the fund achieves specific performance targets. Clearly identify any fee changes to ensure that the fund provides good value and a competitive cost structure.
Overall, many of the potential changes are illustrated in the unitholder circulars and voting materials sent to investors. It’s important to go through these materials and call your fund company to answer any questions that you may have.
Kagan, Julia. “Performance Fee.” Investopedia. Dec 20, 2017 https://www.investopedia.com/terms/p/performance-fee.asp