Not long ago, mutual fund companies were begging investors to stay. Now, a growing number are turning their backs on new money. Since the beginning of October, 13 funds have closed to new investors, according to Morningstar. (On Monday, it’ll be 14.)
So far, the closings are just a trickle, not a flood, and most of them are “soft closes,” which means the fund will still accept money from existing shareholders. But they do mark a significant change from the last two years, when formerly-closed funds actually reopened to offset the substantial losses of the crash, says Russel Kinnel, the director of mutual fund research at Morningstar. In 2008, even the legendary Sequoia Fund (SEQUX) opened to new investors, taking in new money for the first time since 1982.
Although it seems odd that a fund manager could complain about his fund getting too big, that’s exactly what a close signifies. Depending on the fund’s strategy, too much money can leave a fund manager with two uninviting choices: buy too many shares of a few great ideas, or buy up more companies. Neither is a good option. Holding too many shares of a company, particularly a small one, can make it tough to sell out of a position quickly, says Jeff Tjornehoj, a senior analyst at Lipper, and the more companies a fund holds, the more it performs like an index fund, making it hard for investors to justify the higher fees for active management.
These issues arise more quickly in illiquid or constrained markets, which means that micro or small-cap funds or funds focused on emerging markets (where companies tend to be smaller) are the most likely to close. But sometimes large-company funds close too, in particular deep value, concentrated portfolios like Sequoia or Longleaf Partners (LLPFX), which closed to investors in 2004 but reopened in 2008. It’s generally considered “good behavior” for a manager to close a fund if it grows too large or too quickly, Kinnel says: It’s seen as a sign that the fund company is willing to put its investing strategy ahead of its appetite for management fees.
When should a fund shut its doors? That depends on its strategy and the average size of its holdings. For example, a fund that invests in companies with an average market cap of $500 million, has 75 names in its portfolio and doesn’t want to put more than 3% of its assets in any one stock can’t realistically manage more than about $1.25 billion, says Doug Kreps, a CFA and principal at Fort Pitt Capital Group, a fee-only investment management firm that oversees $1 billion in assets. On the other hand, an emerging-markets fund could grow to $5 billion before potentially raising concerns, he says.
We found three funds with strong track records that are open now but have closed in the past – and could do so in the near future.
Wasatch Small Cap Growth (WAAEX) With $934 million in assets, this small-company portfolio closed to new investors in December 2001, then reopened in March 2008. It now has $1.2 billion in assets, in part because it boasts performance better than 74% of the funds in its category for this year, and for the last 3- and 5-year periods, according to Morningstar. “It wouldn’t surprise me if it closes sometime in the near future,” says Eric Huefner, the firm’s director of mutual funds.
Bridgeway Micro-Cap Limited (BRMCX) This fund uses quantitative models to guide its investments in very small companies, typically around $435 million in market cap. That’s a highly illiquid market, and the fund closed to new investors in 2003 with about $55 million in assets. It reopened in October 2008 after some large institutional investors pulled out, says Mike Mulcahy, the president of Bridgeway’s funds. At $23.2 million, it’s certainly not back to its former size, but “we do intend to close it again” at some point, Mulcahy says, because “we try to keep it smaller and more nimble.” The fund has underperformed recently – but because it has a performance-based management fee, its current expense ratio is zero, Kinnel says.
Vanguard International Explorer (VINEX) Vanguard last closed this international growth fund in August 2004, with assets of $2 billion, because of concerns investors were chasing short-term performance, a company spokesman says, adding that hot money can disrupt a fund’s strategy. The fund reopened in October 2008 and now counts assets of $2.4 billion, but it recently added a second advisor, and there are no immediate plans to close it, the spokesman says. With an expense ratio of 0.45%, it’s the cheapest fund in a pricey category, where the average expense ratio is 1.48%, according to Morningstar.
Trackback URL for this story: http://www.smartmoney.com/tb/Jdyo.2BtA.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
RT @SmartMoney: 3 Mutual Funds Soaring -- and Set to Close http://bit.ly/cTXWe6
Unlike a simple calculator or worksheet, lifeplan provides step-by-step actions to help you put - and keep - your financial house in order.
This award winning column addresses estate planning, individual retirement accounts, long-term-care insurance and strategies for selecting variable annuities.
Read Full Article »