If you were an investor in M&G's Global Technology fund you will have recently found yourself shunted into its Global Growth fund instead. That may not seem like a bad thing, as anyone who invested £100 when the Global Technology fund was launched in 1999 would have seen their investment dwindle to just £70 a decade later.
But performance is not the only issue. Those who bought Global Technology did so presumably because they wanted exposure to the kind of software and internet companies that were the staple fare of that fund.
Now they find themselves in a fund that has less than 10% of its assets in the sector and has the likes of drug group Schering-Plough and oil company Chevron among its biggest investments.
While the 10-year performance of the technology fund does not look that good, it was in the second quartile in its sector and, if you had bought in five years ago, you would have seen your investment grow by more than 20%.
M&G says it closed the fund because the technology sector is no longer in demand among investors. It is certainly not the must-have investment it was during the glory days of the technology boom, when investors were desperate to get their hands on the next go-go idea.
Other technology funds have gone the same way - for example, Framlington's NetNet, one of the most hyped launches of the period, was combined with the firm's Nasdaq fund to become Axa Framlington Global Technology.
The M&G Global Technology merger is just one example of a host of funds to have combined with others, or closed altogether, this year. Experts are predicting that such actions will increase sharply.
That has less to do with lack of interest among investors than with fund management companies needing to cut their costs as markets have stalled and sales to private investors remain sluggish.
Christopher Traulsen, director of fund research at Morningstar, calculates that 3,592 funds across Europe closed or merged in the first five months of 2009 alone, more than in the whole of 2007. If closures continue at that rate - and they are more likely to accelerate - more than 8,000 funds will close this year, up from 5,223 in 2008.
Traulsen attributes the surge in fund closures to a similar surge in openings when stockmarkets were booming in the years before the credit crunch. Fund managers, he says, "launched whatever they thought they could sell", rushing out products in trendy areas such as climate change, Africa, the BRIC emerging markets and the like.
Not all launches were successful, leaving the industry "very fragmented" with funds that "failed to attract enough money to be economically viable".
That was bad enough when booming stockmarkets were enticing investors and increasing the value of funds under management - and therefore management fees - but now markets are flat to falling, costs have come sharply into focus, and that includes the cost of running small or unpopular funds.
Europe does seem to have more funds than it needs: Justin Urquhart Stewart, head of marketing at Seven Investment Management, says the number of funds across Europe rose by 31% in the last seven years to almost 33,000, or four times more than the number for the US.
That partly reflects the disparate cultures across Europe, but also highlights the enthusiasm with which fund managers filled any small gap in their fund ranges during the boom years - not all of which were enthusiastically received by investors.
Small fund, smaller profits
Dean Cheeseman, head of fund of funds at F&C's multi-manager team, calculates that 40% of the 2,300 UK funds have less than £30 million in them - and given the compliance, management and other costs involved in running a fund, it is difficult to make a profit on running such small funds.
His firm is in the process of merging some of its funds and he thinks other management groups will also be reviewing their fund ranges.
Mergers of investment management groups can speed up that process - and the pace of these is also hotting up. This year alone, deals have included BlackRock acquiring Barclays Global Investors, Henderson Global Investors taking over New Star, GLG Partners buying Societe Generale Asset Management, and Aberdeen continuing its acquisition spree by adding the fund management business of Credit Suisse.
While it may take some time, rationalisation of product ranges after such deals is almost inevitable.
It has already started at some of the merged firms. New Star had announced plans to close its Heart of Africa fund before the Henderson acquisition and, since the deal, New Star's Equity Income and High Income funds have been combined.
There is also likely to be consolidation of New Star funds into Henderson ones when the two firms' operating platforms are standardised, which could take a year or more.
Urquhart Stewart says investors need to be alert to the risk of mergers and closures. "Mergers and closures, not unsurprisingly, disturb investors and they will tend to disinvest if they feel they are just being passed around as an unwanted nuisance.
Equally, investors should be on their guard to ensure they are not just being shoehorned into a conveniently larger fund just to reduce that fund manager's costs and headcount - you could easily end up in a fund that might be significantly different from what you wanted to be in."
He points to examples such as a green fund turning into an emerging markets investment, and a food and retail fund being transformed into a basic materials one. If your fund is valued at less than £30 million you should be alert for the possibility of corporate action by the manager.
Cheeseman says even the most specialised of funds should be able to amass more than this or have the prospect of growing above that. He says if a merger is announced investors should consider aspects such as whether the same fund manager will be running the new vehicle and whether the objectives of the fund - or the style under which it is being managed - have changed.
Certainly, closures and mergers can be expensive for investors - New Star's Heart of Africa, for example, returned less than 18p for every 100p invested.
Mark Dampier, head of research at Hargreaves Lansdown, says closures of specialist funds can often be a buying signal - such as when M&G's Gold & General fund was merged into its Global Basics fund in January 2001.
That was roughly the low point for the gold price, but since then it has more or less quadrupled. So keep your eyes on the index of technology shares.
This article was originally published in Money Observer - Moneywise's sister publication - in September 2009