Charles A. Jaffe | Fidelity's fund-merger bid and other recent questions

It's time to take a look back at a few recent columns where developments have raised new questions from investors. Here are some of those questions, answered.

Question: A few months back, you wrote about Fidelity merging its Nordic fund into its Europe fund, as if the deal was done. It wasn't. Investors voted against it. I was OK with the merger, but now I am worried about what happens if Fidelity has to keep the fund open but doesn't really want to run it any more. Should I be worried?- Jonathan, Weymouth, Mass.
Answer: Fidelity's plan involved less specialization and greater economies of scale; the two funds share the same manager and at least part of their geography.

But Nordic shareholders clearly did not like the idea, having bought the fund to get that specific regional focus.

Now they have a different concern.

Proxy vote-downs are extremely rare in the fund world. When a management company wants to merge or liquidate a fund, it is suggesting that it no longer wants to run the money, at least not without the changes it has requested.

Uninterested managers are bad.

That said, Fidelity's statements after the merger was voted down and Nordic was reopened to investors suggest that Fido will run Nordic for the "foreseeable future."

Investors can take solace in the fact that Nordic is not some tiny orphan. It has more than $600 million in assets, and manager Trygve Toraasen is staying put. But if management floats another proxy vote to make a change - and has shareholders pick up the tab - or if there is a management change, shareholders should put the fund on their "watch list" and make sure there is no drop-off in quality.

Expect Fidelity to float the idea again, some time after Nordic's performance cools.

Fidelity, by the way, will go ahead with a vote on the other merger it announced in April, sending a proxy in August to shareholders in Fidelity Advisor Korea asking to merge the fund into Fidelity Advisor Emerging Asia. With under $60 million in assets, the Korea fund is small enough that shareholders should worry that management will liquidate the fund if the merger proposal fails.

Question: You wrote about a hostile takeover bid for a mutual fund, where the directors just ignored it. I saw that Fidelity shareholders voted down a merger. Couldn't shareholders vote for a merger, forcing management to take one?- Bill, Malvern
Answer: The folks behind the TFS Market Neutral fund took an action that comes as close to a hostile takeover bid as you can see in mutual funds. They wrote a letter to the directors of Phoenix Market Neutral fund pointing out that the Phoenix fund is a laggard and that the TFS fund is a leader. The letter went on to ask if it would make sense for Phoenix to switch managers, presumably to TFS.

The Phoenix board tossed the letter, unanswered. TFS management has never gotten a response.

While the Fidelity non-merger shows that investors have some power, the truth is that they have no way of bringing a hostile takeover to a vote. Unlike corporations, where issues can be raised by dissident shareholders, there is no real mechanism for that kind of action in mutual funds.

Shareholders can certainly contact a fund's board asking for action, but such correspondence is likely to be treated in the same way as the TFS proposal. While a shareholder might get a polite reply, he or she will not get any action; if you want different fund management, vote with your feet and take your money elsewhere, rather than trying to slug it out with entrenched, protected overseers of your money.

Question: You said that returns for the next 25 years will be down, close to 6 percent a year, and how investors had to change their expectations. What if I cannot change my expectations because I need 10 percent to 12 percent. I am saving as much as I can, I am doing all I can, and 6 percent returns are not enough for retirement.- Reg, Englewood, Colo.
Answer: Paul McCulley of Pimco - author of Your Financial Edge - says that he expects stocks to return 6 percent to 8 percent annually over the next 25 years. Getting above-market returns has always been a matter of being willing to take greater risks, concentrating your portfolio in assets with a higher risk/reward profile.

Ultimately, going whole-hog after greater returns can leave investors vulnerable to a bigger retirement-savings shortfall if the market works against them. So if you cannot change your expectations for investment returns, you need to ask yourself two questions: How can I get a return that is consistently 60 percent to 100 percent above the average market gain? And, what happens if I fall short?

If you cannot change your expectations and you cannot come up with a plan to answer the first question, you may well live through your answer for the second one.