Splitsville: Why Fund Share Splits Don't Matter

There might be no more annoying and pointless phenomenon in the fund world than the share split, yet it remains a staple trick play in some companies' playbooks.

For example, Monument Funds soon will execute a 3-for-1 share split on its broker sold (MFMAX)Monument Medical Sciences fund and a 2-for-1 share split on its broker-sold (MFTAX)Monument Telecommunications fund, according to company announcements released over the last week. The firm's announcement smacks of a sales pitch -- as if to say, if you missed our fund when it sold at $10 a share, here's your chance to buy there again -- but even a cursory look at the situation proves that this argument is at best weak and at worst misleading.

Here's how it works: On Dec. 15, shareholders of the Medical Sciences fund will receive two additional shares for every one they own at the close of business the night before, and shareholders of the Telecommunications fund will receive one additional share for every share they own.

These moves -- oddly called "stock dividends" in the company's statement -- neither raise nor diminish the value of a shareholder's investment in the fund. That's because the fund's net asset value or share price will be divided accordingly. In other words, the Medical Sciences fund's NAV will drop from around $30 to around $10 and the Telecommunications funds' NAV will drop from around $20 to around $10.

The problem is that a fund's share price -- no matter how high or low -- doesn't make a fund more or less attractive as an investment. Though a few investors might avoid funds if they think their share prices are high, a fund's share price is not a factor. That's because a fund's NAV is based on the underlying value of the stocks in the fund's portfolio. The upshot: A dollar invested at any price will get the same investment return whether the fund's share price is $10 or $10,000.

Fund companies know this. It seems many investors do too. Consider that (VFINX)Vanguard 500 Index, the largest fund in the nation with $104.8 billion in assets, had a $132.02 share price at the close of business Tuesday. You can't really say there's a different set of rules for sector funds either. The $8 billion(FSPTX)Fidelity Select Technology and the $2.8 billion (FSPHX)Fidelity Select Health Care fund, two strong sellers, had $138.08 and $160.02 share prices, respectively, at Tuesday's close.

So why bother with this split thing? Perhaps because investors often associate splits with positive events in stock investing, an association that gives a fund room to kick up a P.T. Barnum-style sense of urgency.

Both funds launched at the start of 1998. The Medical Sciences fund has solid returns compared to its peers, but neither fund has attracted much in assets so far.

Although splits for shares of a company's stock also don't have any bearing on a company's actual value, the argument for stock-share splits is better: Because stocks often have to be bought in round lots, reducing a stock's share price makes it more accessible to modest investors. Of course, this argument doesn't work for funds, where investors buy dollar amounts, not blocks of shares.

What's even more confounding about these planned splits is that Monument typically sells its funds through brokers and other financial advisers. These folks should definitely see this nonevent for what it is -- unless a few advisers are buying into the specious marketing side of splits. For what it's worth, Monument's press release says the splits are the result of "numerous requests from shareholders and financial advisers," in a quote attributed to David Kugler, the firm's president.

Monument isn't the only fund shop doing the split thing. AIM Funds, a bigger, Houston-based firm that also sells its funds through brokers, has executed splits for its Blue Chip and Aggressive Growth funds in recent months. It plans a 3-for-1 stock split for AIM Value on Nov. 10.

But for Monument it seems like a fairly regular pattern. The firm offers four mutual funds and soon three will have executed splits -- the firm's sagging (MFITX)Monument Internet fund, recently renamed and transformed into Monument Digital Technology, had a split last year.

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