February 10, 2006
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The Bull Market
By DIYA GULLAPALLI and SHEFALI ANAND
February 10, 2006; Page C1
A mutual fund by any other name is still a mutual fund. But if that name changes, investors should take notice.
Mutual funds have been busy changing their names at a rapid pace. Last year alone, 719 funds fiddled with their names, according to Lipper Inc., a research firm, up from 505 the year before. The changes vary from the minor -- "Turnaround Fund" changed its name to "The Turnaround Fund" because of trademark issues, it said -- to the controversial: In recent weeks, Merrill Lynch & Co. said it would rebrand its "Merrill Lynch" funds with the name "Princeton Portfolio Research & Management," raising the ire of Princeton University.
One reason for the flurry of name changes is the spate of corporate mergers over the past year or so, such as Bank of America Corp. acquiring Columbia Funds and Wells Fargo & Co. acquiring assets from Strong Financial Corp. Name changes like these don't necessarily mean that there is something different about the fund. Still, it should be a yellow flag to investors to keep an eye peeled for more significant modifications to, say, the fund's management team or investment strategy.
Other new names are marketing moves: Merrill is making the switch because it wants brokers outside the Merrill network to feel more comfortable selling the funds. An executive at Merrill's money-management unit, which is based near the university in New Jersey, initially said Princeton University's reputation would help to connote prestige for the funds. That angered Princeton, and Merrill this past Wednesday issued a statement saying it didn't mean to "suggest any association with the university."
Fund companies usually don't have to ask investors' permission for a change except under fairly narrow circumstances. As a result, name changes can sometimes be confusing for shareholders because mutual funds tend to gloss over the explanation deep within the funds' regulatory filings.
Occasionally, new names point to a more significant transformation of a fund. Westwood Realty Fund, for instance, changed its name to Westwood Income Fund in July so it could pull back from its original focus on real estate. The managers felt that investments in real-estate investment trusts -- originally the fund's primary focus -- were becoming costlier and riskier after several years of outsized gains, so they set out to modify the rules in order to invest in other income-producing securities.
In this case, the fund's managers, Gabelli Advisers Inc. and Westwood Management Corp., had to get shareholder approval for the change. That is because the Securities and Exchange Commission requires funds that invest at least 80% of assets in a sector, geographic region or type of security implied by the fund name to seek shareholder approval when changing that name. The regulation has been made less restrictive in recent years: Before taking effect in 2002, it was triggered at a lower 65% level.
Brian Casey, chief executive of Westwood Holdings Group, said the change reflected the company's attempt to reduce the riskiness of the portfolio. "We wanted to increase the yield and not be forced to own 80% or more in an asset class we may not want to," he said.
Several funds have changed their names to stay in compliance with the SEC's 80% name-rule requirement. Among them is the Merrill Lynch Small Cap Value Fund, which was renamed Merrill Lynch Value Opportunities Fund in 2004. The fund removed "small cap" partly to give it the option of holding on to a stock even if that company grew in size to the point that it wasn't technically a small-company stock anymore, according to fund spokeswoman Megan Frank.
Sometimes it is a matter of fixing a name that leaves investors scratching their heads. The tiny American Century EmVee Fund changed its name in 2004 to American Century Newton to "clear confusion among investors," said a company spokeswoman. It's old name -- EmVee -- stood for "mass times velocity," the formula for calculating momentum, whereas the new name "Newton" refers to Sir Isaac Newton and his law of motion.
"Motion is a key driver in the fund's stock-selection process," the company said in a statement explaining the change, referring to the mathematical techniques that the fund uses to make investments.
Studies show that investors put a lot of weight in fund names. A 2003 academic study that looked at funds in the "growth," "value," "small" and "large" categories found that funds that had changed their names over the years reviewed attracted 22% more money than other funds of a similar size and investment strategy that didn't change their names. These flows are concentrated in funds that made a name change that is in line with a popular investment style, because investors tend to associate good performance with these names.
Funds don't lose existing investors by changing their name, but they "might be able to attract new customers," said Raghavendra Rau, a visiting professor at the University of California at Los Angeles, co-author of the study. Professor Rau adds that name changes are usually concentrated among smaller funds and take place in waves as fund managers try to capitalize on buzzwords. For instance, when "growth" stocks are in vogue, he said, you see a race to insert words suggestive of growth into fund names.
In 2004, the $317 million Goldman Sachs Internet Tollkeeper Fund dropped the word "Internet" from its name because of the "negative connotation associated with the word 'Internet,' " said Andrea Raphael, a Goldman Sachs spokeswoman. The fund's investment strategy -- to invest in e-commerce companies -- remains the same.