MUTUAL FUNDS are not collector's items. They don't come in "limited editions."
But it is increasingly hard to treat the Wasatch funds as anything but collector's items: interesting to talk about but hard to acquire and build a portfolio around. For proof, look no further than the firm's next fund, which will open next year.
Wasatch is a small Utah firm known for outstanding small- and micro-cap investing. It is also known for the admirable attribute of shutting down funds to maintain an optimal asset size.
Six of the firm's nine equity funds are closed to both new and existing investors. Full disclosure: I am an investor in one of those closed funds.
Wasatch's most recent new issue was Wasatch Micro-Cap Value, a fund that was open for precisely one day in August 2003. Management hoped to limit the fund to about $20 million in assets to start, so it kept word of the fund as quiet as possible; they wound up taking in about three times their target, and insiders were none too pleased.
So the company's brass is trying to make sure it doesn't happen again with Wasatch International Opportunities, the fund it plans to open in January. Wasatch International Opportunities will be a foreign micro-cap stock fund, and its target size is, again, $20 million.
Having failed at that with its last fund, the firm is taking extraordinary measures this time around.
International Opportunities will be available by subscription only.
Wasatch will take applications for the fund beginning Jan. 12 next year, and will shut down in two weeks or at $20 million, whichever comes first (bet on the $20 mil).
Subscription offerings are rare in the fund world. About five years ago, during the latter stages of the bull market, Janus, Invesco, Acorn, Baron and Matthews International were among firms that opened funds by subscription, creating the feel of an "initial public offering."
But funds aren't stocks. They don't get the "pop" of an IPO, and subscriptions generally are only a so-so proposition for investors.
Pre-opening periods help a mutual fund company handle heavy inflows, making sure that a huge wave of cash doesn't force a temporary closing within a day or two of opening.
In Wasatch's case, however, the idea is to get the money and stop (in spite of how much more the firm could make by taking in, say, $100 million). The company is not discussing how the process will work - Wasatch director of mutual funds Eric Johnson said details will be available on the firm's Web site shortly before the period opens - but it likely will require investors to have the money on hand in advance. The cash will be rolled into International Opportunities on a first-come-until-the-fund-is-closed basis.
With Wasatch, cash on hand is a bit tricky. Investors can withdraw the money from existing accounts, but the six closed funds won't let them replace it. Consumers who want a new account will likely wind up parking their cash in the firm's money-market fund in anticipation of the opening.
(The new fund will have a $5,000 minimum for taxable accounts, $1,000 for IRAs and a maximum investment of $35,000.) Says Johnson: "We're not focused on demand, or on gathering assets, we're trying to ensure performance. ... When we come out with a new product at Wasatch, it is research-generated, meaning we see new opportunities in the space. If we have to limit a fund in order to take maximum advantage of those opportunities, we'll do it."
The drawback of any subscription offering is that the first investors pay all of the initial trading costs, the brokerage commissions that are not part of a fund's expense ratio but which get taken off the top.
By keeping the fund small, Wasatch International Opportunities will be pricey, carrying an expense ratio that's capped at 2.5 percent. The small assets mean expenses likely will be at that level, which is about 40 percent more than the average international stock fund.
Even with all of the hoops investors must jump through for the new fund, they may still be turned away because Wasatch can call the whole thing off if it wants to curtail inflows.
Says Johnson: "The subscription period allows us to walk away from this, to say, `We're sorry, but this is not the way we want to run money,' and to send everyone's money back."
That would be an unheard-of step in the fund business, but it would add to the firm's reputation for looking out for the (relatively few) shareholders it lets in the door.
In the end, however, Johnson acknowledges that investors should not be interested in International Opportunities just because it will be hard to get into.
"This is not a fund for everyone," Johnson says. "We don't want people rushing into it, because many of them would be making a mistake. You buy a fund because it's a good fit, not because it looks like it might be hot."