Fund companies are turning to those good guys of yesteryear

Your Funds

Dollars & Sense

April 22, 2001|By CHARLES JAFFE

The stock market's decline has put the pinch on mutual fund firms. Assets have been leaving stock funds and migrating toward safer havens.

Funds based more on marketing gimmicks and trends than on time-tested investment philosophy have been particularly battered.

Lacking a long-term track record, many newer and smaller funds are folding, with fund companies trimming their losses on issues that have done so poorly that it would take years of recovery to make the fund's history look good.

Without hot, new stuff to sell, fund companies are relying on old standbys, bringing funds out of mothballs and reopening them to new investors in an effort to keep the cash flowing.

Good long-term records attract the dough in down markets.

This week and next, this column will examine both ends of the spectrum, funds that are reopening and those that are shutting down, and what investors should look for in each situation.

On the surface, a fund that re-opens to new investors always looks like a good deal.

Funds close to new investors for several reasons, notably to control growth when they are hot or to avoid feeling forced to buy new stocks when the market lacks the kind of buying opportunities the manager normally pursues.

Some funds never reopen. Among those that do, the motivation is usually the desire to pursue buying opportunities, ease cash-flow problems caused by downturns, or simply keep management's fees high.

Fund firms get paid a slice of the assets they manage; when market conditions shrivel those assets, using a proven winner to bring money back into the fold is a boost to management.

This month, Vanguard moved to reopen two funds with superior long-term records, Primecap and Capital Opportunities.

Both have posted annualized average returns of more than 20 percent over the past five years, and both have been closed to new investors for more than a year.(Primecap reopens tomorrow; it will require the same $25,000 minimum account as Capital Opportunities, which has already re-opened.)

That isn't likely to save the funds this year, when both are showing losses in the 8 percent range. In fact, a performance downturn is commonplace for almost any fund that reopens.

Morningstar Inc. shows more than 200 funds closing to new investors since 1997, with nearly half reopening.

Among those funds are issues with big names and reputations, such as Putnam New Opportunities, Fidelity Contrafund, Firsthand Technology Innovators, Longleaf Partners and several Van Wagoner funds.

Study information on funds that reopen is inconclusive, but don't expect a quick blast-off.

"Funds aren't usually reopened when everything is going well," says fund consultant Burton F. Greenwald in Philadelphia.

"It often takes a downturn to get managers to take new money, and there is no promise when a fund re-opens that everything will turn around right away."

With that in mind, here are three questions to ask that can help you evaluate a fund that is reopening.

Is reopening consistent with the fund's strategy and good for new investors? If management sees opportunities now that its preferred investments are out of favor, that's good. But if the fund simply wants new money to stem the tide of what is leaving, that's hardly a compelling reason to write a check.

To figure this out, examine why the fund closed in the first place - look for press releases on the company Web site or ask its phone representatives - and see if the hype on reopening is consistent with the logic used in closing the fund.

Am I riding the wave or acting contrarian? Right now, buying a newly reopened fund is contrarian, because there are few hot funds out there to consider. During the technology boom, however, some popular funds opened just to pursue quick-hit, go-with-the-flow opportunities.

If you're buying a fund that has been in the doldrums, it's more important to see how the fund fits into your portfolio than to hope that it can return to past glories.

Could the fund close again? In hot times, funds that reopen often take in some cash and then close.

But the current market is cold, so you don't need to act fast to get in.

That being the case, don't feel pressured to buy into a good fund that is reopening; take your time and size the fund up more for its potential than its past.

Next week: The alarming trend of mergers and liquidations.

Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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