A Mutual Fund That Lets You Be An Arb

Arbitrageur Fred Green took over the management of a $10.5 million mutual fund in 1989, renamed it the Merger Fund, and gave it the mission of investing in takeovers after deals were announced. Under his tutelage, this fund--the only mutual fund of its kind--has always made money. Still, by the end of 1992, the Merger Fund only had $1 million more than when Green started.

Last year, when merger activity started to pick up, so did the fund's return--up 17.7%. And this time, investors took notice. Today, the no-load Merger Fund has $85 million in assets, more than triple what it had in December. Some $2 million a week is pouring in. It's up 3.2% for the year so far, which doesn't sound like much until you consider that most mutual funds are in the red.

What's pulling in the money is the fund's unique character. "We have a beta of zero," says Green, "which means the fund is largely insensitive to the fluctuations of the stock market." The Merger Fund is a lot less risky than other equity funds. Morningstar Inc., which tracks and rates mutual funds, figures the Merger Fund has the third-lowest risk rating of 1,970 funds. Some financial advisers are recommending the Merger Fund to add balance to a portfolio.

Green says he runs the fund just the way he runs the $45 million in private accounts that his firm, Westchester Capital Management Inc., manages. He and co-manager Bonnie L. Smith are conservative. They spread their investments among 40 deals. And like most arbs, they also hedge their positions whenever possible by short-selling the acquirers' stock. Six of the fund's top 10 holdings, including McCaw Cellular Communications, Adia Services, and BancFlorida, are hedged (table).

The Merger Fund's portfolio now holds many of the better-known takeover targets--Kemper, Gerber Products, and Syntex. But it also has Aldus Corp., a graphics software company that Adobe Systems Inc., a competitor, wants to buy. With Aldus selling at $23.75 a share and its estimated deal value surpassing $29, many arbs are shunning the stock. There's a lawsuit by Altsys Corp., whose software Aldus sells, and potential antitrust problems as well.

"The market says the deal is no slam dunk," says Green. But he believes the problems will be resolved, possibly with a small reduction in Adobe's offer. But even if that happens, Green expects Aldus will end up "an extremely profitable deal."

Successful funds usually attract competitors. But Green says he's not worried. "I've got a 15-year record in arbitrage." Right now, that's something most mutual-fund companies don't have.

               THE MERGER FUND'S TOP HOLDINGS
                              June 20 Takeover Estimated  Annualized
                          stock price  value*   close   rate of return
      McCAW CELLULAR COMM.     $52.13  $55.88 SEPT. `94 23%
      KEMPER                    59.25   62-64   OCT.    17
      ADIA SERVICES             35.50   40.00   SEPT.   46
      BANCFLORIDA               28.50   30.00   QEPT.   19
      SYNTEX                    23.00   24.00   JULY    39
      GERMANTOWN SAVINGS BANK   60.50   62.00   SEPT.   10
      BALTIMORE BANCORP         19.88   20.75   OCT.    13
      GERBER PRODUCTS           51.13   53.00   SEPT.   15
      PSI RESOURCES             21.75   22.63   SEPT.   12
      ALDUS                     23.75   29.33** AUG.    118
      *Estimated      **#Subject to possible renegotiation
      DATA: WESTCHESTER CAPITAL MANAGEMENT INC.
      
Before it's here, it's on the Bloomberg Terminal. LEARN MORE