Fund mergers mean fewer mutual funds to choose from

— -- The mutual fund industry is shrinking, and a wave of mergers and acquisitions could diminish it further.

Fund companies have eliminated 208 funds this year, vs. 281 for all of 2008, according to Lipper.

After two devastating bear markets this decade, "A lot of fund companies are looking for ways to get lean and mean," says Lipper analyst Tom Roseen. Getting rid of small and poorly performing funds is one way to do that.

Although funds typically become profitable when assets pass $50 million, many larger fund companies are interested only in funds with assets of $500 million or more, says Bert Greenwald, a Philadelphia fund consultant. "Unless they can grow a fund's assets to half a billion dollars, they're going to think twice about maintaining them," Greenwald says.

Funds have also been merging unwanted funds into larger, more successful ones this year, although at about the same pace as last year. Companies have eliminated 72 funds that way this year, vs. 172 for all of last year.

Merger-and-acquisition activity means that more redundant funds will be eliminated. There's no reason to offer two Treasury-only money market funds, for example.

Banks seeking to raise capital might be the biggest sellers of mutual funds in the coming months. The largest recent deal: Barclays' move to sell iShares, its giant exchange-traded-fund arm, to BlackRock for $13.5 billion.

The iShares deal could spark other financial companies to shed their fund businesses: The final sale price was at least double the initial bids. "The BlackRock deal sent a signal that people are buoyant and optimistic for the fund industry," Greenwald says. "And banks are clearly motivated sellers."

Other rumored deals: Bank of America may be looking for a buyer for the Columbia funds, and Lincoln Financial Group may sell the Delaware funds, says Geoff Bobroff, a fund consultant. "We've seen a smattering of banks indicate that the fund business didn't fit with their long-term view," he says.

Jefferies Putnam Lovell, an investment banking firm, says that although there will be fewer mergers and acquisitions this year, they will be larger than last year.