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 editor of The Independent Adviser for Vanguard Investors, I’ve heard from investors over the years who have been 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!
When the Front Door Slams Shut… Go Around the Back!
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.
4 Ways to Get Into A Closed Mutual Fund
If a fund closes its doors, investors still have four options to get in on the action:
Tip #1 – Wait until the fund reopens (if it reopens).
Believe it or not, funds don’t always remain closed forever. For example, in the past, Vanguard has reopened several of its top-performing closed funds to investors.
Tip #2 – Go through the back door.
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, they can transfer the appropriate number of shares of the fund to you. It’s the same thing as if someone transferred shares of IBM (NYSE:IBM) or Google (NASDAQ:GOOG) 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).
Tip #3: Find the fund’s long-lost twin.
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 one last option:
Start looking for the fund’s long-lost twin. Seriously, if all else fails, look for a clone of the closed fund.
Tip #4: Clone management style.
Even if you can’t find a similar fund managed by the same team, you can often find a fund that’s just as good but managed by another team. For example, when 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 at Fidelity as well as at T. Rowe Price International Discovery (MUTF:PRIDX) who all have comparable skill in providing great returns in international small-caps.
Don’t Be Turned Away!
Hey, Dorothy got to see the Wizard. She wasn’t going to be turned away at the front door.
So, next time your favorite fund family slams the door in your face, go around back and knock again!
