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The velvet rope is dropping
in front of more mutual
funds. Some smaller cor-
ners of the market have
stalled recently, even as
the Standard & Poor s 500
index closes in on its
record high. That means
some fund managers are once again welcoming
new investors, after they had closed their funds
years ago to new money.
More than a dozen mutual funds have
reopened their doors over the last year, accord-
ing to data compiled by Morningstar. The num-
ber doesn t include funds that have partially
re-opened; those that still bar new entrants
but allow longtime investors to add more
Funds reopen to investors when they re look-
ing for new cash to invest. That usually comes
after assets have shrunk because their corner
of the market has broadly struggled or because
the fund s managers have made poor invest-
ment choices. In 2008, when the financial
crisis sent global markets plunging, at least 46
mutual funds reopened to new investors.
The funds that have reopened over the last
year cover a grab bag of categories, including
natural resources and dividend-paying stocks.
But more than a quarter of them focus on
small-cap stocks, which hit a wall last year.
Small-caps had their worst performance in 16
years relative to large-cap stocks.
"You look at the market as a cycle, and there
tend to be times to sow and times to reap,"
says Buzz Zaino. He s the lead portfolio manager
of the Royce Opportunity fund, which has
closed twice since 2003 when the small-cap
market was hot and buying opportunities were
scarce. It has also reopened twice, when the
market was down and cheap stocks were easier
Analysts generally see it as a sign of good
stewardship if a fund closes before growing
too large. A bigger pile of assets can mean
more fees for fund managers, but it also forces
them to use it. Stock pickers can run out of
ideas they feel strongly about if they have too
much cash. Another danger for small-cap stock
funds in particular is that a fund could build
up too big a stake in a single stock, which
makes selling later on more difficult.
One of the latest funds to reopen is the
Perkins Small Cap Value fund, which has a
silver analyst rating from Morningstar. The
fund closed to new investors in 2010 when a
rush of interest was pushing its asset level
That s because the fund easily beat com-
petitors for three straight years through 2009
by focusing on high-quality, small-cap stocks
that hold up better during downturns.
Since closing, assets for the Perkins Small
Cap Value fund have shrunk to roughly US$1.7
billion from a peak of close to US$3.5 billion.
Its investing style held it back in the years fol-
lowing the financial crisis, when low-quality
The fund lagged the average return for its
category in 2010, 2012 and 2013. Then in 2014,
small-cap stocks stalled due to worries they d
become too expensive relative to their earn-
In mid-2014 the fund began considering
reopening, says co-manager Justin Tugman.
The slowdown for small-cap stocks meant
that valuations were looking more attractive,
and the fund s managers saw more potential
Another co-manager of the fund, Tom
Reynolds, says that in the past six to nine
months, the team has been analysing 10 to 15
new stocks a week as potential purchases.
The fund reopened to new investors at the
start of last month.
So, does it pay to invest in a newly reopened
fund? One consideration is that it s typically
a contrarian investment. Funds usually reopen
only after struggling, whether that s due to
the market they focus on or their own mis-
The best-case scenario may be the Tweedy,
Browne Global Value fund. Since reopening
in 2008, it has produced an annualised return
of roughly 5.5 per cent. Over the same time,
the average foreign, large-cap value stock fund
has lost 0.1 per cent annually.
But it s close to a flip of a coin as to whether
the fund will outperform its peers. Among
226 mutual funds that have reopened to new
investors since 2000, 112 have gone on to do
better than the average fund in their category.
That s almost exactly 50 per cent.
Another consideration is that a newly
reopened fund could close if it gets hot and
assets run up again. It may seem like an odd
bit of altruism for a fund to close down when
it could reap more fees by staying open. But
don t think that it is.
"There is no such thing as altruism," says
Royce Opportunity s Zaino. "You re doing it
for your own health over a longer period of
time. You want to maximise your returns, and
that s part of the process." AP
reopen their doors
to new investors
Funds reopen to investors
when they're looking for new
cash to invest. That usually comes
after assets have shrunk because
their corner of the market has
broadly struggled or because the
fund's managers have made poor
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