Fund Merger Mania

The most recent merger/acquisition in the fund industry is AGF and Global Strategy! Rest assured, this won’t be the last of the merger activity in the financial industry.

At the end of August, AGF had 51 funds available and Global Strategy had 23. With the amalgamation of the 2 companies, it is likely that there is room for amalgamation of funds because of duplication and redundancy.

Other notable mergers include C.I. and BPI, Trimark and AIM, Templeton and Bisset, & Guardian and Alexandria.

Readers have asked me about whether these mergers of funds and financial companies are good or bad. So I offer some general comments:

  • Companies merge for market share and economies of scale. Looking back at the proposed bank mergers, much of their stance was to attain economies of scale to be able to compete globally with banks around the world.
  • With economies of scale, you would hope that the primary benefit to the investors would be lower management fees and costs. Many investors would question whether these cost savings are actually being passed on. However, in talking to C.I. Funds, Vice President Derek Green, says that the BPI funds have seen on average a 40% reduction in expense ratios as a result of cost saving from the merger.
  • Mutual Fund companies are in the business of making money. Don’t let anyone fool you . . . mergers, acquisitions and consolidations are in the interest of the company and the shareholders first.

If you have funds that are merging into other funds, you might want to ask some of the following questions:

  1. Will there be any tax consequences as a result of the merger? Sometimes merging funds can have significant tax implications. Usually, the financial institutions are well aware of the implication but it is a good idea to ask. One example I can provide is when AIM bought GT Global Funds. Although there was some duplication of funds and fund mandates, some funds were not merged because of tax reasons. In particular, the AIM Canada Premier and the AIM Canada Growth Class are separate funds today despite similar mandates. The AIM Canada Growth Class operates separately because it is part of the AIM Corporate structure giving it distinct tax benefits.
  2. Will there be any cost savings passed on to the investor? Theoretically, there should be some cost savings but it will depend on the significance of the merger. For example, if you merge one large fund and one small fund, you may see a reduction in costs from the smaller fund to the bigger one (and not as much the other way around).
  3. Will there be any changes in managers? Once again, usually, fund mergers are strategic from the standpoint that fund companies want to improve their product line up. It would be difficult to understand why a financial institution would merge two funds and keep the inferior fund manager. However, that being said, asking the question and knowing the answer may give you a little more comfort in understanding the motivation behind the merger.
  4. Will there be any changes in the mandate of the funds? The mandate of the fund should be one of the reasons you bought the fund in the first place. According to IFIC, you can find the fund mandate in the Simplified Prospectus and you should be aware of what the manager of the fund can and cannot do.

If you get a letter in the mail about your funds going through a proposed merger, chances are it will be for the better. However, don’t be afraid to ask the company or your financial advisor some questions just to be sure.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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