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September 05, 2006
Pax World and Citizens Announce Engagement
    by Bill Baue

The marriage would consolidate two leading socially responsible investing firms with primarily complementary offerings.


Pax World Funds is courting its neighbor, Citizens Funds. The announcement came last week in a prospectus supplement Citizens filed with the Securities and Exchange Commission (SEC) notifying shareowners of the signing of a non-binding letter of intent to be acquired by Pax. The two socially responsible investing (SRI) firms reside one street away from one another in Portsmouth, New Hampshire.

"We're always talking to each other and doing initiatives together," said Sophia Collier, president of Citizens. "It's natural to see companies considering joining forces to compete more strongly in a period such as this when the SRI industry is experiencing a lot of momentum because the political atmosphere of the last six years has made people realize the importance of monitoring corporate behavior and addressing global warming."

"The most successful mergers try to collect the best practices from each side and implement them across the board," Ms. Collier told SocialFunds.com. "And our product lines are primarily complementary, not competitive."

Bill Rocco, an analyst for fund rating agency Morningstar who covers SRI, concurs, and sees potential benefits in their distinct offerings.

"Their lineups are fairly complementary, so there's potential for some cross-pollination of ideas," Mr. Rocco told SocialFunds.com. "Not counting money markets, Citizens has seven funds and Pax has three, and they only overlap in two areas--mid-growth, and what we call moderate allocation or balanced funds--so I'd be surprised if they didn't merge these two Citizens funds into the Pax funds."

The Pax World Balanced Fund (ticker: PAXWX), the 35-year-old granddaddy of SRI funds, has about $2.1 billion in assets and hence could readily absorb the Citizens Balanced Fund (CFBLX--$11 million in assets) without much impact, Mr. Rocco expected.

"While Vanguard and Fidelity can have multiple moderate allocation funds, clearly it doesn't make sense for a small SRI shop to have more than one," Mr. Rocco added.

Likewise for the mid-growth funds. Merging with the Citizens Emerging Growth Fund (WAEGX--$176 million) could benefit the Pax World Growth Fund (PXWGX--$110 million) by more than doubling its size, according to Mr. Rocco. Larger funds can typically afford to lower their expense ratios.

"The two bugaboos for Citizens are manager turnover and cost, so what we'd want to see after the merger is manager continuity and costs coming down--some of the Citizens funds are reasonably priced, but some are expensive," said Mr. Rocco.

Other potential strengths of the proposed merger include the firms' proximity, obviating the need to relocate families, as well as their mutual familiarity. For example, Pax CEO Joe Keefe served as general counsel and executive vice president of Citizens from 1997 to 2000, so he has intimate knowledge of the firm's strengths.

"Citizens has a first-class investment team and social research team with an enormous database of social research, and those are very desirable assets," said Ms. Collier. "In any successful transaction, those are things that any rational person would seek to preserve and strengthen."

Ms. Collier points out that such a merger process involves trustees performing due diligence to fulfill their fiduciary duties, filing proxies that the SEC reviews, and soliciting shareowner approval, all of which typically takes three to four months.

 

 
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