Fund Restructuring- Part I

Posted by admin on Feb 12, 2012 7:12:45 PM

There has been much movement in the mutual fund industry recently in terms of fund restructuring.

As the economic crisis started in 2008, a sort of cleansing process in the market took place. A number of those funds that were not well-positioned from a portfolio standpoint and those funds who had been trudging along in an attempt to pull in enough assets to successfully manage a mutual fund were forced to cut bait. This is illustrated by an ICI survey showing 845 funds that either liquidated or merged in 2009 - the most in any year going back to 2000[1]. So, in effect, and in the spirit of Darwinism, those funds most fit were able to survive.

Fast forward a couple of years and some would argue you have a market ready to move forward again. Not exactly the same market you had going into 2008, but there are signs of progress, and those funds that have survived the fallout are (or should be) in a position to attract the dollars sitting on the sidelines of those investors who haven't quite gained enough confidence to re-enter the market.

Fund restructuring, through a variety of ways, is just one of the tools that fund managers are using to entice these investors back into the market. There are a variety of ways to restructure a fund, each with its own agenda and consequences:

  • Merger - in this scenario, two or more funds are consolidated into one. There are a variety of ways this transaction can be favorable to management and the investor. For example, a fund family may have two funds that invest in a similar fashion. By merging the two, there are considerable cost efficiencies that can be gained while still capturing the income of that type of investment style.
  • Adoption - in this scenario, a fund is lifted from one fund series or family and placed into another. This can be attractive to an investor as it can be an efficient way to offer an investing discipline within the fund family that may have not existed previously, therefore retaining the loyalty of that investor within the fund family. In many of these scenarios, the original advisor of the adopted fund continues to manage the fund in a sub-advisory role causing little disruption to the operations of the adopting fund family.
  • Liquidation - in this scenario the fund liquidates all its assets and makes distributions to its shareholders ceasing to exist. One obvious way this can be advantageous to managers trying to attract assets is by eliminating funds that may not be operating effectively.

We have had many conversations with existing and potential clients regarding the advantages, consequences and the related operational and tax issues of restructuring funds. In a series of upcoming blog posts, we will work through some of those considerations given their relevance to today's marketplace for mutual funds.


[1] Investment Company Institute 2011 Investment Company Fact Book

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