Mutual fund liquidations could reach record levels in 2009 as assets decline and fund management companies trim overhead.
"I think we are likely to see in excess of 500 fund liquidations this year," said Geoff Bobroff, an East Greenwich, R.I.-based mutual fund consultant.
Through Dec. 23, 359 funds were liquidated last year, compared with 257 in 2007, a 39.6% increase, according to the Denver-based research firm Lipper Inc., which based its figures on fund portfolios, not share classes.
In 2001, a record 581 fund share classes were liquidated.
"The nichier, high-risk portfolios that lost very high double-digit figures are walking the plank right now," said Jeff Tjornehoj, Lipper senior research analyst.
Especially vulnerable are funds that focus on emerging markets, Latin America, China and high-yield bonds, he said.
"Since most of the trouble came in October and November, January will be an important time to evaluate current conditions," Mr. Tjornehoj added.
TROUBLE WHEREVER YOU LOOK
"There is vulnerability in every category, except perhaps for short-bias funds, market-neutral and some Treasury-related bond funds," he said. "Any share class that is not cost-effective is headed for the chopping block, in my view."
"Some funds have shrunk from market depreciation and may not be economically viable," said Howard Schneider, president of Practical Perspectives, a Boxford, Mass.-based in-dustry consulting firm. "In that case, it's better to fold them than to hold them."
Specifically, "one area that has not done very well is 130/30 funds," Mr. Bobroff said. "These funds have not gained a lot of assets, and they have egg on their face in terms of performance."
Money market funds also hit a rough patch, and with interest rates at an all-time low, more money funds may go out of business, Mr. Bobroff said.
Mergers can also cause funds to fold. However, as a result of the small number of asset management company mergers last year, fund mergers declined to 300 in 2008, from 472 in 2007. Still, some may be in the offing. Shareholders at Wachovia Corp. of Charlotte, N.C., in recent weeks approved the merger with
Wells Fargo & Co. of San Francisco. The move has the potential for subsequent fund mergers, observers said.
Even before the fall meltdown, some funds were hit by troubled holdings.
State Street Global Advisors of Boston liquidated its SSgA Yield Plus Fund (SSYPX) in June when the fund reeled from exposure to mortgage-backed securities and investors fled, said Miriam Sjoblom, mutual fund analyst at Chicago-based Morningstar Inc. The Evergreen Ultra Short Opportunities Fund (EUBAX) also was liquidated in June when the fund lost value and had to meet redemptions, according to a spokeswoman with Evergreen Investments of Boston.
NEW LAUNCHES
Not surprisingly, 2009 is not expected to be a banner one for fund launches, said Dan Culloton, senior fund analyst at Morningstar, who noted that managers tend to launch funds similar to those that have done well in the recent past.
"Bear market short-term-Treasury-bond funds and government bond funds did well in 2008," he said. "But I wouldn't be surprised if we saw fund companies trying to put more things out that tried to exploit the current fear in the market focusing on safety, security, steadiness and stocks that pay dividends."
With the White House promising to strengthen infrastructure, it could lead to new funds, Mr. Bobroff said. "I think you'll see micro-cap or small-cap be the focus, and infrastructure funds," he said.
Many new funds probably won't track the indexes, said Neil Elmouchi, president of Summit Financial Consultants Inc. of Westlake Village, Calif., an affiliate of
LPL Financial of Boston that has $125 million in assets under management.
"You're going to see a lot of market-neutral long-short funds and absolute return," he said. "These funds do not guarantee that you won't have a loss. But investors should seriously take a look at the absolute return or market-neutral in determining components of their portfolio."
Mr. Elmouchi is considering allocating more to bond funds. "With new money coming in, we are looking very seriously at a larger debt play than equity play on the short term," he said.
Plain vanilla is the new sexy, said Michael Kalscheur, senior financial consultant at Castle Wealth Advisors LLC of Indianapolis, which has $300 million in assets under advisement.
"Long-short managers have done well, and conservative value funds pay high dividends," he said. "In-vestors have expressed a lot of interest in balanced funds."
E-mail Sue Asci at [email protected].
