With investors pouring money back into the stock market, T. Rowe Price Group Inc. has closed two more of its most popular mutual funds to new investors in order to protect returns for existing shareholders.
The moves come as regulators and industry critics have scolded some mutual fund firms for not closing popular funds as they become too large for managers to operate efficiently. Firms are often loath to cut the flow of money into funds they have spent thousands of dollars to market.
T. Rowe Price said yesterday that it closed its High Yield Fund and Small-Cap Stock Fund on Friday in order to protect the funds' investment strategies. The Baltimore-based investment firm announced Dec. 8 that it had closed its Mid-Cap Growth Fund for the same reason. Existing shareholders will still be allowed to increase their holdings.
Analysts said it's a sign the company is putting investors' needs ahead of management's desire to build assets.
"I think that T. Rowe Price deserves credit for showing the discipline to close a fund when they believe ... that it needs to be closed," said Robert Hansen, an equity analyst with Standard & Poor's in New York.
The industry has grown increasingly sensitive to investors' welfare after state and federal regulators opened a sweeping probe of trading abuses at some prominent mutual fund firms and brokerages last fall. T. Rowe Price has not been named in any of the complaints.
Funds that target a popular segment of the market can attract billions of dollars as investors chase high returns. In some instances, they grow too fast and can artificially drive up stock prices, as occurred with Internet stocks in the late 1990s, Hansen said.
Often, fund managers find they can't invest new assets fast enough, forcing them to park significant amounts of money in cash accounts that earn tiny returns. In other cases, portfolio managers run out of good stocks to buy in the segment they are targeting, forcing them to look for stocks that might be outside a fund's stated investing guidelines.
"Obviously, as a corporation there's a benefit to us to continue to attract assets under management," said Ed Bernard, president of T. Rowe Price Investment Services. "But if we think the pace of cash flow is going to compromise our ability to implement our investment program, we will always protect the interests of investors already in the fund."
Small-cap stock funds enjoyed explosive returns last year as the market rebounded. T. Rowe Price's Small-Cap Stock Fund grew from $3.4 billion in assets to $5.2 billion last year. About $535 million of the increase was from investors pouring new money into the fund, with the rest coming from stock market gains.
"We are concerned that if the recent pace of cash inflows we have seen were to continue, it could eventually exceed our ability to invest effectively in small-cap stocks," said Greg McCrickard, who manages the fund. "Because small-cap stocks tend to be thinly traded, it can be difficult to invest large cash inflows without unduly moving prices."
The firm closed its Small-Cap Value Fund in May 2002 for the same reason.
Similarly, the high-yield fund, which invests in corporate junk bonds, grew from $2.4 billion to $3.9 billion, of which $930 million was new cash coming from investors. The fund's manager said in a statement that further cash inflows would strain the firm's research abilities and force the fund to adopt a less-effective investment strategy.
Hansen, the S&P analyst, said the decision to close the funds won't have a noticeable affect on Price's ability to attract investors. The firm will most likely steer investors to other funds or launch new products, he said.
Shares of Price closed yesterday at $50.94, down 13 cents.