by Dan Wiener | April 21, 2012 6:00 am
Closed funds are a harsh reality of mutual fund investing and 401(k) investing. Sometimes there are great investments and fund managers that are just not available to you.
Has this happened to you? You hear about a hot fund, go online and do your due diligence only to be turned away like Dorothy at the door to the Emerald City? It’s happened to me and countless other mutual fund investors over the years, and if I’ve learned one thing it’s this: Don’t give up!
As the leading authority on Vanguard funds and a resource for tens of thousands of 401(k) investors, I’ve heard from many folks over the years who have been frustrated by closed funds. It’s no fun to be turned away at the door after strong track records prompted fund managers to close a hot fund. It can be worse than waiting in line for a table on the Upper East Side of Manhattan! But like the old saying says, “When one door closes, a window opens.” And today, I’m going to show you four ways to prop open the door on a closed fund!
Mutual funds close because fund managers have limitations on how much cash they can handle. When a fund has a hot streak of performance, investors hoping to join the party pour their money in, and managers can’t always find places to put the new cash. Sometimes that’s because of the fund’s investment mandates or SEC regulations, and sometimes it’s just because there’s a lack of good buying opportunities in the market.
Some funds only close to new investors. That means if you had an account in the fund when it closed, you can keep putting money into it. But some funds close completely. That means no one can put any more money into the fund. Either way, if you don’t already have an account in the fund, you’re locked out.
If a fund closes its doors, investors still have four options to get in on the action:
Believe it or not, funds don’t always remain closed forever. In the past, Vanguard reopened several of its top-performing closed funds to investors in its Flagship program (meaning they are kind of open, but not entirely… I’ll get to that in a moment), and a series of well-known value investing shops from Tweedy Browne and Dodge & Cox, to Southeastern Asset Management and Third Avenue, reopened their own closed funds after the markets stumbled in 2008 and 2009.
Going in through the “back door,” so to speak, is an investor’s best bet if you are not sure whether that fund will ever open its doors again. Here’s how you do it: Ask your fund company for a “Transfer of Shares to New Owner” or “Change of Ownership” form — most fund companies have one.
Then, find a trusted friend or family member who’s already a shareholder in the fund, and give your friend enough money to meet the fund’s investment minimum. Once it’s invested, he or she can transfer the appropriate number of shares of the fund to you. It’s the same thing as if someone transferred shares of IBM or Google into your name. (Note: Not all funds will allow this, and you might have to sort through a lot of rules, but it can work. A number of my readers and clients have reported success with this technique with the Vanguard Fund Family over the years.)
So you’ve waited outside the front door, gone around back and knocked only to find the fund is really closed. There’s no loophole, no window, no way to get in on the profits. Don’t give up. You still have another option: Start looking for the fund’s long-lost twin. Seriously, if all else fails, look for a clone of the closed fund.
For example, Vanguard Capital Opportunity (MUTF:VHCOX), run by PRIMECAP Management, is one of my favorite all-time funds. Unfortunately, it closed to new investors back in 2004.
However, PRIMECAP also manages its own funds. PRIMECAP Odyssey (MUTF:POGRX) and the PRIMECAP Aggressive Growth fund (MUTF:POAGX) are a close match to Vanguard Capital Opportunity.
Even if you can’t find a similar fund managed by the same team, you often can find a fund that’s just as good but managed by another team. For example, in 2008 when the market was going haywire and the only refuge was overseas, I looked for a team that could match the performance at the closed Vanguard International Explorer (MUTF:VINEX). I came upon a group of managers I trusted at T. Rowe Price that ran the T. Rowe Price International Discovery (MUTF:PRIDX) fund and it ended up slightly outperforming VINEX! This proves that if you can match management style, you don’t need to break into the fund.
One final word of advice: Dorothy got to see the Wizard. She wasn’t going to be turned away at the front door. You should take the same philosophy with your 401(k). Never settle for less when it comes to your retirement.
So, next time your favorite fund family slams the door in your face, go around back and knock again!
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