Some funds close to new investors to ensure current investors' returns

April 25, 1993|By Steve Goldberg | Steve Goldberg,Media General News Service

Some top-performing mutual funds are closing their doors to new investors. Lindner Dividend, Strong Common Stock and Monetta are just a few of the funds closing either temporarily or permanently.

When a fund closes, it's acting against its own short-term self-interest. Other things being equal, the larger a fund is, the higher the profits of its management company.

In closing to new investors, a fund manager is saying he'd rather forgo some quick profits to enhance investors' return. That kind of thinking should be music to the ears of any investor -- at least one who's already in the fund.

There are exceptions. Though funds always deny it, occasionally funds appear to use closings as marketing devices, kind of like a going-out-of-business sale. The Janus Funds, for instance, announced plans to close the Janus Venture Fund, a top-performing small company stock fund, when its total as sets reached $750 million. But the company announced the closing more than two months before the fact. By the time the fund actually closed, it held $1.2 billion, an unwieldy amount for a fund specializing in small stocks.

Why does a fund close?

Generally, it's because the fund's manager feels he's getting too much money to manage efficiently.

There are endless debates over the optimum size for a fund. Most financial advisers say a fund specializing in small company stocks may have trouble turning in good numbers once it gets much over $500 million in assets no matter how good its manager. Funds that buy large company stocks can often handle several billion dollars in assets without hurting performance.

When a fund announces plans to close, some investors rush to invest while there's still time. Once an investor has established an account in a fund, he can usually continue to make additional investments even if the fund closes to new investors.

There's no hard-and-fast rule for handling fund closings, says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter based in Irvington-on-Hudson, N.Y. But, in general, he doesn't think investors should try to get in before the door slams shut. With literally thousands of mutual funds available, it's rare that any fund is a once-in-a-lifetime opportunity.

Moreover, studies have found that in the period after funds close their performance tends to lag. That's an indication that funds often have become unwieldy by the time they close.

Mr. Jacobs and other advisers say, however, that some funds are unique enough that one should try to beat the closing deadline.

Mr. Jacobs also likes Mutual Discovery (800-448-3863). The funis run by Michael Price, a top veteran value investor with billions of dollars under management. Discovery will specialize in small stocks -- the stocks Price built his reputation on -- and Price plans to close the fund when it reaches $300 million.

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