What to ask when funds bar new investors



As small-company growth funds took off earlier this year and the hot performance of MFS Lifetime Emerging Growth Fund attracted cash, Massachusetts Financial Services made a tough decision.

The company decided to stop accepting money from new investors as assets of the $400 million fund -- to be renamed MFS Emerging Growth Fund and merged with a $300 million sibling in September -- reached $1 billion.

Last month, assets hit $976 million -- after net sales of shares and portfolio appreciation -- and the company chose Jan. 14 as the fund's closing date.

What made its decision difficult was the conflict between two goals: to maintain the fund as a vehicle for prospective shareholders and to maintain portfolio manager John W. Ballen's ability to manage the fund for existing shareholders by inhibiting its growth. Not surprisingly, MFS sided with existing shareholders.

It wasn't the first adviser to confront this dilemma. Others -- especially those managing funds concentrated in small companies' stocks -- have reached similar conclusions.

Fund closings pose tough questions for investors, too.

* If a hot fund is going to close, should you rush to get in?

* If you're in a fund that is closed to new investors but isn't performing well, should you stay because you might not get back in if it turns around?

* If a closed fund reopens, should you buy as soon as you can?

There are no easy answers. Whatever the situation, your decision to buy, stay, add to holdings or redeem should be

based mainly on a fund's suitability for you.

You should determine, for example, whether a small company or other type of aggressive-growth fund is appropriate for you. But no one can know whether a fund's good performance will continue after it's closed.

The announcement of the closing, in fact, could attract so much money that it cannot readily be invested in securities similar to those credited with a fund's performance. The money might have to be parked in low-yielding money-market instruments, thus limiting returns.

An extreme example occurred in 1991, when an announcement of the closing of Janus Venture Fund gave new investors three months to buy shares. In that period, the fund grew from $745 million to $1.2 billion, largely because of share purchases.

"It was a mistake," James P. Craig, portfolio manager until recently, says of the three-month notice, which was given to allow financial planners to get clients into the fund. (He gave up Venture's reins to concentrate on running Janus Fund.)

In considering an equity fund whose closing is announced, study the factors behind management's decision. They might provide hints as to the likelihood that the fund will continue to excel.

Size is important, but it's not everything. Funds have closed at levels ranging from $200 million to $3.4 billion, which Vanguard/Windsor had attained when it was first closed in 1985.

What matters more is how the assets are invested. The success of a fund whose manager prefers to invest in a small number of stocks, like CGM Capital Development, Janus Twenty and Sequoia, depends on the manager's maintaining his skill in stock selection.

A fund that is invested in many stocks and adds more as cash comes in may achieve lower risk through diversification -- but its performance may tend to be weaker.

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