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Will Corporate Mergers Spoil These Funds?

We take a look at how corporate mergers may impact two fund families.

Russel Kinnel, 08/01/2006

When the advisor to a good fund merges with another firm, it sometimes ends up hurting that fund's shareholders. Among the problems that can crop up following these transactions: Key investment personnel may leave due to culture clashes or compensation issues, fees might be raised or sales charges added to no-load funds, and funds may become bloated due to a greater desire to generate fees (and thus justify the acquisition). Here's our take on funds from two shops that were recently acquired.

ICAP Equity ICAEX, ICAP Select Equity ICSLX, ICAP International ICEUX
In May 2006, New York Life Investment Management announced that it would acquire Institutional Capital Corporation (ICAP), the advisor to these three very solid funds. (ICAP Select Equity and ICAP International are Fund Analyst Picks in the large-value and foreign large-value categories, respectively.) From the standpoint of the funds' shareholders, it's difficult to see any upside. In addition to generating strong results, ICAP has run the funds in a shareholder-friendly way. Although none of the three is particularly large, the expense ratio for each fund has been capped at a reasonable 0.8%, as the firm has shared economies of scale afforded by its sizable institutional accounts. (Each of the funds earns a Stewardship Grade of A.) Meanwhile, New York Life runs the Mainstay Funds, which generally charge much higher fees and have posted middling returns.

To be sure, there's no need for investors to panic or sell the funds. While New York Life plans to roll out broker-sold share classes of the ICAP funds, the expense ratios of the no-load shares aren't expected to change (although they will soon close to new investors). What's more, ICAP's principals, including lead portfolio manager and president Rob Lyon and comanager Jerry Senser, have signed employment contracts with New York Life, although for an undisclosed length of time, and they report that New York Life won't tinker with ICAP's investment staff. As long as ICAP's key investment professionals stay on board and the funds' costs remain at their modest current levels, these funds are still quite attractive. That said, we plan on keeping a close eye on changes to personnel and costs. Also, New York Life's sales force will likely be able to attract assets to the funds, which could eventually spark capacity concerns, particularly given ICAP's fast-trading approach. But potential asset bloat is a distant concern for the funds at this point.

RS Diversified Growth RSDGX, RS Emerging Growth RSEGX, RS MidCap Opportunities RSMOX, RS Value RSVAX
Also in May, Guardian Investor Services, a division of Guardian Life Insurance, said it would buy a 65% stake in RS Investments, the advisor to the RS funds. The situation here is a bit less worrisome. While the four funds above have generally performed well over the long term, they and their siblings aren't particularly cheap: RS Emerging Growth, for example, carries a 1.54% expense ratio-which is 22% higher than the no-load median-despite an $840 million asset base. On the other hand, many of Guardian's funds, which are broker-sold, sport modest price tags for the A shares. For example, Guardian Park Avenue Small Cap GPSCX, which is far smaller than RS Emerging Growth, charges 1.25%.

On the investment side, Guardian's managers and analysts likely won't have much contact with those at RS. A team from Guardian that runs its large-blend and small-blend funds will report to the head of RS, while RS' growth and value teams will continue to function as they do now. Brokers may eventually start selling the more successful RS funds at a rapid rate but, as with ICAP, it's far too soon to fret. Therefore, we think shareholders of three of these four RS funds have reason enough to hang on-Diversified Growth, which lost its veteran skipper last year, is the exception

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