Funds With M&A Benefits

by Alan Lavine and Gail Liberman

Expect to see several mutual funds benefit from a rising number of corporate mergers and acquisitions.  Fueling the trend: Low interest rates, soaring corporate profits and cash-rich companies.  Merger and acquisition activity in Europe already has hit its highest level in 20 years. And private equity funds are investing heavily in deals.

Published reports indicate that there were more than $2 trillion in merger and acquisition deals in November.

Mario Gabelli, president of the Gabelli Funds, says that in addition to low-cost financing, new accounting rules are fueling this trend.

Want to invest in mutual funds that play the merger and acquisition game?

Lower-risk options, according to Morningstar Inc., Chicago, include: 

• The Gabelli ABC Fund.

• The Arbitrage Fund, of Walter Island Capital LLC, New York.

• Merger Fund, of Westchester Capital Management Inc., Valhalla, N.Y., which, at this writing, was closed to new investors. These funds invest in announced deals and profit when acquisitions are finalized. The funds use merger arbitrage investment strategies. Over the past five and 10 years, the funds have grown in the 6 percent to 7 percent annual return range.

Higher-risk funds include:

• AXA Enterprise Mergers and Acquisition Fund. This fund uses merger arbitrage. But it also invests in companies that have the potential to be taken over.

• The Gabelli Small Cap Growth Fund. This fund invests in smaller companies that sell below their private market value. The private market value is the value someone would pay to acquire the company, based on the value of independent parts. Many small companies may be acquired, Gabelli said.

 Drawbacks to merger and acquisition funds: They may be forced to park money in cash when times aren’t right. Plus often, announced deals can fall through.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.