Handling a Major Fund Switch

ADVERTISEMENT

Imagine an arranged marriage where you don’t see your betrothed until the wedding day — and don’t learn much more for years.

That’s what it’s like when the mutual fund you’ve had for a long time is merged with another that’s a complete stranger. It’s an issue many mutual fund investors face now, thanks to the merger of Wachovia and Wells Fargo (Stock Quote: WFC).

In votes on June 8 and June 21, shareholders approved the merger or reorganization of 61 funds, including Evergreen funds from Wachovia and Wells Fargo’s Advantage funds. It’s the latest step in the 2008 merger between the two banks. These and other fund changes still to be approved are to take effect in July.

Is this good or bad? Wells Fargo, naturally, says it’s good, pointing out that fees will come down for some funds. Of course, streamlining the fund offerings also cuts costs for Wells Fargo and its shareholders, so fund investors are wise to think about whose interests Wells Fargo has put first.

For fund investors, the real issue is whether the new funds will perform as well as the old ones, and there’s just no way to know because the new funds have no real track record.

The fund managers, however, do have histories. Some of the funds involved will simply get new names and keep their old managers, others will get new managers. Wells Fargo has details on its site.

Investors should never simply assume that the funds they’ve had in the past should be kept forever, and any significant change is a signal to reassess sooner rather than later. Regardless of whether an investment has done well or poorly, the key question is: “Would I buy it today?”

Start by comparing the fund’s performance to its peers. If it hasn’t beaten a majority of them over three-, five- and 10-year periods, think seriously about getting rid of it.

As you’ve surely heard many times, take a close look at fees. All else being equal, choose a fund with the lowest fees you can find.

Tax issues can bedevil your decisions whenever a merger, poor performance, manager change or other factor compels you to get out of a fund you’ve had for some time. Even if the fund hasn’t done well recently, you may be sitting on big taxable gains from earlier years.

As a rule of thumb, tax issues should not dominate investment decisions, but they can tip the balance in a close call. It would not make sense to incur a big tax by pulling out of one fund just to move to another that isn’t much better.

Fortunately, Evergreen and Wells Fargo investors will not be hit with tax bills when their funds are merged. And if they don’t like the merger, they can bail out, move to a new fund and still have plenty of time for year-end maneuvers to minimize taxes.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

Show Comments

Back to Top