Amid shrinking assets and a flood of redemptions, mutual funds that were closed to new investors are rolling out the welcome mat again.
Year-to-date through Oct. 31, 66 funds have reopened, compared with 38 during the same period a year earlier, according to Morningstar Inc. of Chicago. Many of the newly opened funds are focused on small- and mid-cap companies and are more susceptible to declining assets.
Nearly a third of this year's re-openings have occurred since June 30.
Six funds reopened last month, including the $447.8 million Evergreen Special Values Fund (ESPAX), which is run by Evergreen Investments of Boston; the $5.1 billion Fidelity Mid-Cap Stock Fund (FMCSX), which is run by
Fidelity Investments of Boston, and the $390.6 million Acadian Emerging Markets Portfolio (AEMGX) that is offered by Acadian Asset Management LLC, also of Boston.
While financial advisers should be cautious about directing client assets into these funds, the wave of reopenings may present a chance to buy into funds with strong track records, analysts say.
"If you've got nerves of steel, it could be a good time to start investing," said Bridget Hughes, a fund analyst at Morningstar.
"It's an opportunity to invest in some really good managers who were closed," she said. "It's a limited window, especially in some of the micro-cap funds."
Some advisers agree.
"It might be an opportunity to upgrade your manager," said Jeff Bernier, chief executive and chief investment officer at TandemGrowth Financial Advisors LLC of Roswell, Ga., which has $60 million in assets. "If you find those managers that have demonstrated value over enough time, I'd be willing to bet with those guys."
Daniel Traub, president of Tempo Financial Advisors LLC of Natick, Mass., which has $20 million in assets, is weighing whether to invest in two funds that recently reopened: the $3.1 billion Sequoia Fund (SEQUX), offered by Sequoia Fund Inc. of New York, and the $834.8 million Artisan International Value Fund (ARTKX), offered by Artisan Partners Limited Partnership of Milwaukee.
"There are definitely some good funds that closed through the years that I would have liked to have gained access to," Mr. Traub said.
Still, some advisers suggest waiting.
One reason is that mutual funds are required to pass through to investors realized capital gains at least annually. A lot of those gains are being logged this year as the result of redemptions that triggered a fund's reopening to begin with.
Investors who buy into a fund with a lot of embedded capital gains now could soon find themselves hit with a hefty tax bill.
"We are in the season where distributions are flying out," said Scott Toms, chief investment officer at Cornerstone Wealth Management Group in Hagerstown, Md., which has $140 million in assets under management. "Investors need to do some homework. These funds may have some capital gains distributions from forced selling this year."
CAUTION WARRANTED
Mr. Traub, meanwhile, is worried that the newly reopened funds will close their doors as soon as they amass more assets.
"It's hard to put money into a fund now, not knowing if you are going to be able to put money into it next year," Mr. Traub said. "That's my concern about jumping in with both feet."
Of course, that's not likely to happen anytime soon.
Amid the stock market's historic volatility — as seen by Dow Jones Industrial Average's nearly 900-point swing last Thursday — investors are yanking money from mutual funds. Stock and bond funds posted net outflows of $63.5 billion in September, up dramatically from $12.1 billion in August, according to the Investment Company Institute in Washington.
Even reopened funds are experiencing outflows. In fact, the 66 funds that have reopened this year have posted a total of $24.3 billion in net outflows year-to-date through Oct. 31.
"Even the funds that reopen are going to have problems getting a whole lot of interest," said Morningstar's Ms. Hughes.
Investors may not be jumping in right away, but fund managers say that could be a mistake.
"If you think we are going into a depression, you probably don't want to buy," said Brian Bythrow, portfolio manager of the $70 million Wasatch Micro Cap Value Fund (WAMVX) which reopened Oct. 24 and is advised by Wasatch Advisors Inc. of Salt Lake City. "If you think it's a
recession, stocks just don't get cheaper than this. Many stocks are at the bottom deciles of historic valuations."
E-mail Sue Asci at [email protected].
