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Will Your Foreign Fund Still Be Around in 2018?

The odds are worse if it targets just one country or region.  

Karin Anderson, 01/31/2013

When you buy a fund, you assume it will be around for many years. After all, most likely you're making a long-term commitment. But how can you follow the standard advice to own funds over the long term--rather than moving in and out in an attempt to time the market--if the fund disappears on you?

Unfortunately, that sort of thing does happen, and it's far more common in single-country and regional stock fund groups than in other overseas categories. While the focus here is on open-end mutual funds, single-country and regional exchange-traded funds have experienced the same trend: more liquidations proportional to the number of offerings available.

Here Today, Gone Tomorrow
The table below reflects how much the single-country and regional categories have changed during the past five years. This includes how much each category has grown (or shrunk) overall based on the amount of fund launches and liquidations that occurred between January 2008 and January 2013 (the figures exclude fund mergers). For comparison, figures for broader overseas categories--foreign large-cap, foreign small/mid-cap, and diversified emerging-markets--are reflected as well.

For the regional and single-country categories, India Stock and Pacific/Asia ex-Japan Stock have grown the fastest. However, they experienced relatively high levels of liquidations as well. Taking into account the older funds in the category and all recent fund launches, more than 20% of funds in these two categories were closed down during the five-year period. By contrast, a fast-growing broad category, Diversified Emerging Markets, was far more stable. Only 10% of its funds closed down over the period.

The most severe level of liquidations occurred in the Japan Stock and Diversified Pacific/Asia categories. These were the only groups to experience more liquidations than launches during the period. The Europe Stock category offers just as many options as it did in early 2008, but it still saw plenty of change with five newer funds replacing five that were taken off the market. The China Region category is the outlier in terms of having a much lower rate of liquidations at 8%. This was half the Foreign Large-Cap average, in fact. That might be due to the fact that China, despite the slowing of its breakneck pace of economic growth, remains a market of great interest and attention.

Why the Short Shelf Life?
Still, compared with the broader overseas categories, regional and single-country funds groups have experienced a more extreme revolving door of launches and liquidations. One can argue that these funds attract less attention due to the peripheral role they play, thereby making it tougher for them to gather enough assets to be viable. ETFs have also provided more competition in recent years. Today there are roughly as many ETF offerings for each of the single-country and regional open-end fund categories. But these groups of ETFs are also experiencing higher levels of fund launches and liquidations compared with broader overseas ETFs.

One explanation for this trend comes from the tendency of fund companies to jump on investment trends without the proper investing expertise and resources to back the newly launched funds. When these new funds fail to attract assets and/or outperform, the companies pull the plug. The following table shows the average "shelf life" of the surviving and liquidated funds from these categories.

Karin Anderson is a senior mutual fund analyst with Morningstar.

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