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Geez - a really good question. Probably lots of reasons. I've heard that $50 mil assets is a commonly accepted break-even point. If the fund can't garner that much in a few years, or if assets drop below that for some reason, than the fund may be considered unprofitable and liquidated in some manner. Sometimes the assets are sold off and the cash returned to shareholders. Sometimes the assets are merged into a healthier and larger fund. As far as what shareholders receive, it should be the full value of their shares (NAV) at the time of liquidation. This does not necessarily mean at a "loss", though it is probably true that most that liquidate have suffered from a prolonged period of underperformance. This is just my best guess. Kipling will hopefully chime in with more here.
or too many somewhat similar funds, and the company goes through the efficiency/ cost cutting exercise. or the initial fad idea of the fund (like multiple internet funds in the 1999) no longer works. or a unique "star" pm departs/ leaves/dies.
since mutual funds are valued daily and, generally, invest in liquid securities, you'll get your portion of the fund's value. the liquidation usually takes anywhere from a month to several days depending on the liquidity of the underlying asset class. some credit or microcap stuff being worked through for several weeks, and large cap equity, in a day or two. you do get somewhat increased transaction costs imbedded in the latest NAV, so it is probably doesn't make sense to hang on until the end. also, any merger or liquidation causes realization of various gains and losses and might trigger significant taxes if held in the taxable account.
The two most common reasons for "liquidating" a fund are linked: wretched performance and too few assets to remain economically viable. Occasionally strong funds or economically viable funds are also eliminated for personal or business reasons, but that's pretty rare.
I used "liquidated" in quote marks because that's only one of two choices for eliminating an unwanted fund, the other is merge. In liquidation, the manager sells all of the fund's portfolio holdings over a period of weeks, trying to get the best price he or she can. The proceeds are deposited in a bank account and, on the appointed day, the funds in the account are apportioned to fund's shareholders (if you held 1% of the fund's shares, you get 1% of the money in the bank account) and mailed out as checks. That's most common with one fund families or an odd-man-out fund at a larger firm. The other means of elimination is merger: the family picks a fund that's vaguely comparable to the deadster and moves the acquired funds' assets into the acquiring fund's portfolio. In that case, shareholders get shares of the new fund equal in value to their holdings in the old fund.
The chief difference between the two is taxes: mergers are tax-free events, liquidations are not.
Then there is the rare money market fund that breaks a buck (I think that's qualitatively different from Hank's "prolonged period of underperformance").
One of the business reasons that David may have been alluding to is housecleaning (as fundalarm metioned) due to parent mergers (e.g. BofA [Nations funds] and FleetBoston [Columbia]). BofA subsequently sold Columbia to Ameriprise [RiverSource] leading to 62 mergers (some involving more than two funds). These may not happen often, but they can be massive when they happen.
Another of the business reasons is marketing. If a fund has a poor record, it can get "disappeared" by being merged into a better one - even one that is much smaller.
Thus the business reason may not be lack of assets or viability - it could be strictly for show. David gave an example - ING International Fund getting merged away - in his July commentary.
Comments
since mutual funds are valued daily and, generally, invest in liquid securities, you'll get your portion of the fund's value. the liquidation usually takes anywhere from a month to several days depending on the liquidity of the underlying asset class. some credit or microcap stuff being worked through for several weeks, and large cap equity, in a day or two. you do get somewhat increased transaction costs imbedded in the latest NAV, so it is probably doesn't make sense to hang on until the end. also, any merger or liquidation causes realization of various gains and losses and might trigger significant taxes if held in the taxable account.
I used "liquidated" in quote marks because that's only one of two choices for eliminating an unwanted fund, the other is merge. In liquidation, the manager sells all of the fund's portfolio holdings over a period of weeks, trying to get the best price he or she can. The proceeds are deposited in a bank account and, on the appointed day, the funds in the account are apportioned to fund's shareholders (if you held 1% of the fund's shares, you get 1% of the money in the bank account) and mailed out as checks. That's most common with one fund families or an odd-man-out fund at a larger firm. The other means of elimination is merger: the family picks a fund that's vaguely comparable to the deadster and moves the acquired funds' assets into the acquiring fund's portfolio. In that case, shareholders get shares of the new fund equal in value to their holdings in the old fund.
The chief difference between the two is taxes: mergers are tax-free events, liquidations are not.
For what it's worth,
David
Regards
Nath
There are a variety of target maturity funds, e.g. Fidelity Defined Maturity Funds and American Century Zero Coupon Funds that self destruct by design.
Then there is the rare money market fund that breaks a buck (I think that's qualitatively different from Hank's "prolonged period of underperformance").
One of the business reasons that David may have been alluding to is housecleaning (as fundalarm metioned) due to parent mergers (e.g. BofA [Nations funds] and FleetBoston [Columbia]). BofA subsequently sold Columbia to Ameriprise [RiverSource] leading to 62 mergers (some involving more than two funds). These may not happen often, but they can be massive when they happen.
Another of the business reasons is marketing. If a fund has a poor record, it can get "disappeared" by being merged into a better one - even one that is much smaller.
Thus the business reason may not be lack of assets or viability - it could be strictly for show. David gave an example - ING International Fund getting merged away - in his July commentary.