A recent rash of fund closings might be an indication it's time to slow down on emerging-markets equities.
Within the past two months, three of the five largest actively managed emerging- markets funds have either closed to new investors or announced they will soon do so. Existing shareholders will still be able to invest new money with the funds.
The moves are not a sell signal but they may make investors consider whether they should continue pumping new money into emerging markets, said Gregg Wolper, a senior mutual fund analyst at Morningstar Inc.
“It's a wake-up call,” he said. “If you have been putting money into emerging markets, this gives you a chance to reconsider. If markets were really cheap, maybe they wouldn't all be closing.”
The $33 billion Oppenheimer Developing Markets Fund (ODMAX), the largest actively managed emerging-markets fund, announced last week it will close to new investors in April. Spokeswoman Kaitlyn Downing said the closing will help position the fund for continued long-term growth.
It joins the $10 billion Aberdeen Emerging Markets Fund (GEGAX) and the $8.3 billion Virtus Emerging Markets Opportunities Fund (HEMZX), the fourth and fifth largest such funds, in closing to new investors this year.
The $16 billion
Lazard Emerging Markets Fund (LZEMX), the third largest actively managed emerging markets fund closed to new investors in 2010.
That leaves the $20 billion
American Funds New World Fund (NEWFX), the second largest actively managed emerging-markets fund, as the last of the top five that won't be closing to new investors any time soon.
Mutual funds typically close to new investors when they get too big, either through market appreciation or because of new investments, for the managers to execute the strategy. If they remained open, the managers likely would be forced to put new cash to work buying stocks they don't particularly like or let the cash holdings drag down performance.
“It's a positive for shareholders already in the fund,” Mr. Wolper said. “It shows the fund is paying attention to them.”
American Funds uses a multimanager approach to investing funds so as the New World Fund continues to grow, it will simply add more managers to handle the workload and bring new ideas to the team, spokesman Chuck Freadhoff said.
The emerging-markets-fund closings aren't particularly surprising, considering how popular the sector has been since the financial crisis.
As of Jan. 31, emerging-markets funds had received $92 billion of new investments since the start of 2009, according to Morningstar. Total assets stand at $256 billion, up from $66 billion at the end of 2009.
The enthusiasm hasn't been confined to actively managed emerging-markets equity funds. The $61 billion Vanguard FTSE Emerging Markets ETF (VWO), the largest emerging-markets vehicle, and the $50 billion iShares MSCI Emerging Markets ETF (EEM) have combined to take in $62 billion of new investments over the same time period.
The vast flow of new money has come in spite of the volatility in emerging-markets stocks. After falling almost 50% in 2008, the MSCI Emerging Markets Index rallied 68% in 2009 and 16% in 2010. Then it fell again in 2011, losing almost 20%, and rallied again last year to a 20% gain. It's down 2% so far this year.
The infatuation with the emerging markets, and their fast-growing economies, isn't expected to slow down anytime soon. A majority of advisers — 51.4% — plan to increase their clients' allocation to emerging-markets equity this year, according to the InvestmentNews 2013 Investment Outlook survey, in which 592 financial advisers participated.
