You’ve been following a mutual fund for awhile and you’ve decided that this fund is a good fit for your portfolio. You go online to make an initial purchase and you learn the fund has closed to new investments. While you might be frustrated, overall I tend to view fund closures as a positive move in most cases.
Factors that might lead to a fund closing
Typically the main reason that mutual funds close to new investments is that more money is coming in than the managers feel they can effectively invest. Closely related to this is the rule that funds are only allowed to buy into the stock of a single company if that holding is 5% or less of the total value of the fund. (Note a holding may constitute more than 5% of a fund’s value due to price appreciation). Generally fund closures occur in actively managed mutual funds versus passively managed index products.
Fund closures benefit existing shareholders
In my opinion, a fund closure is generally a sign of a fund company that values its shareholders. A case in point is Artisan, a fund company based in Milwaukee. Over the years I have used Artisan Mid Cap Value (ARTQX) extensively in several of the retirement plans for whom I serve as advisor as well in the portfolios of many of my individual clients. The management team of this fund was named Domestic Manager of the Year for 2011 by Morningstar.
Artisan runs 12 funds, of which 5 are currently closed to new investors, including Mid Cap Value. Even with the closure, fund assets have topped $8 billion a high for the fund. The fund’s performance has lagged in 2011, though I don’t think that it is related to the increased size. The fund ranks in the top 1% of all Mid Cap Value funds over the past 10 years.
The fact that Artisan is willing to close a popular fund like Mid Cap Value speaks volumes about the firm. Shutting off the spigot of new money means that the firm will lose the fees it would collect on these assets. Artisan is also in the process of going public.
Examples of large funds that didn’t close
This can work both ways. An example of a fund that in my opinion should have closed to new investment is Ariel (ARGFX). This was an outstanding Small Cap Value fund run by John Rogers, a well-known Chicago-based value investor. Fund assets ballooned from about $600 million in 2001 to over $4.7 billion in 2005. The fund never closed its doors to new money and was forced to increase the market cap of the stocks held in the fund.
As a Mid Cap Blend fund, performance has largely been below average, the fund ranks in the middle of the pack for the trailing 5 years and in the bottom 25% of its category for the tailing 10 years. Performance has picked up in recent years with the fund ranking in the top quarter of its category in 2009, 2010, and year to date in 2012. In-between the fund ranked in the bottom 7% of its category in 2011. This improved performance follows a significant decline in fund assets in recent years.
I haven’t followed this fund for several years and have no client money invested here. Would shareholders have been better served had the fund closed its doors a number of years ago and stuck to the type of investing it was known for? In my opinion yes, but I’ll leave that to others to decide.
On the flip side of this is Fidelity Contra (FCNTX). Will Danoff manages about $85 billion in this fund and over $100 billion in this style (Large Growth) when you add in some other portfolios under his management. The fund has placed in the category’s top 39% or better in every annual period since 2002 with the exception of 2009 (when the fund earned over 29%). For the trailing 10 years the fund ranks in the category’s top 7%. To be able to manage this much money as well as Danoff has year in and year out is a commendable and rare feat.
While asset bloat can be a problem in any fund, it is generally a more serious issue in a fund that invests in small or mid cap stocks. At some point there are only so many good places to invest new cash coming in.
While fund companies are in the business to make money, my experience has been that the fund companies that tend to close funds when they get too big also tend to run funds that are better performers over time. At some point if a fund gets too big it might also become a “closet indexer.” In those situations, why pay the fees associated with an actively managed fund? Why not just buy an index fund or ETF?
What if my fund closes?
Typically if you already own a fund and it closes, you be able to buy more shares if you wish. This is not always the case, however.
If a fund that you were considering closes before you own it, look for an alternative fund. This might be a good opportunity to consider a low cost index fund or ETF in the same asset class.
Feel free to contact me with questions about your investments.
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