Every year, some mutual funds will decide to close their doors to new investors. In some cases, even the existing shareholders will not be able to make new purchases as the investment becomes a closed mutual fund — although, this is fairly rare. But why are there closed mutual funds, and what makes a fund manager close his doors to new money?
The main reason is that the portfolio manager believes it is getting tougher to put the money to work. This is often the case with small company funds. Basically, an investment may be so large that it can actually move the stock price! The good news is that a fund closure is a sign that the portfolio manager is really mindful of the interests of the shareholders. If not, he or she would continue to take money and generate more fees. Right?
So it should not be a surprise that funds that close tend to do relatively well. In other words, if you are a current shareholder, you may want to continue making investments.
But of course, there are exceptions. Some closed funds wind up being poor performers. Interestingly enough, they may ultimately open their doors again. Let’s take a look at some of the good ones – and yes, the not-so-good ones:
Sentinel Small Company (SAGWX)
With $2.6 billion in assets, Sentinel Small Company (MUTF: SAGWX) focuses on growth companies that have market caps below $3 billion. It’s top five holdings include Superior Energy Services (NYSE: SPN) , Diodes (NASDAQ: DIOD), Open Text (NASDAQ: OTEX), Rockwood Holdings (NYSE: ROC) and Nice Systems (NASDAQ: NICE).
Sentinel’s team has complementary skills. Chuck Schwartz’s expertise is with technology, telecom and aerospace. Betsy Pecor, on the other hand, is a veteran of the healthcare sector.
Despite the size of the Sentinel fund, Schwartz and Pecor have been able to post consistently strong returns. The 10-year annual gain was 8% and the five-year average came to about 6%. As for the past year, the return was a nice 35%.
Calamos Convertible I (CICVX)
Sometimes a fund will close because a specialized investment strategy may not work in certain environments. An example is convertible arbitrage. This is a complex investment technique that makes profits from valuation gaps with corporate bonds or even mergers.
One of the top funds in the sector is Calamos Convertible I (MUTF: CICVX), which has $3.7 billion in assets. The portfolio manager, John P. Calamos, is one of the top practitioners of convertible arbitrage (check out a recent piece on him, “3 Funds to Get into the 2011 M&A Action”).
If done right, this investment strategy can generate strong returns during bull markets but also minimize the downside during bear markets. In the case of the Calamos fund, it posted a 6% average annual return for the past ten years and 6.5% for the past five years. As for 2008, the fund only lost 26%, which was certainly much better than the 39% fall in the S&P.
American Century International (AIQBX)
If you look at the worst-performing funds that have closed, many are in fixed income. This definitely makes sense because of the volatility in the markets.
One example is the American Century International (MUTF: AIQBX) fund. With $1.4 billion in assets, the focus is on high-quality foreign government and corporate debt. Unfortunately, American Century had lots of exposure to European bonds, which suffered from the sovereign debt crisis. Actually, about 61% of the portfolio is in the Eurozone.
Over the past three years, the average annual return on the fund was only 0.72%. While it looks like Europe is seeing a recovery, American Century continues to have problems. So far this year, there is a loss of 1.16%
Lord Abbett Natl Tax-Free Income (LANBX)
Another tough part of the market has been in municipal bonds. With the economic problems in many states, there is growing concern about defaults. Some analysts – like Meredith Whitney – believe that the impact can be enormous.
One of the closed muni funds that has felt the impact is Lord Abbett National Tax-Free Income (MUTF: LANBX), which manages about $1.6 billion. The focus is on bonds with intermediate to long-term maturities. At the same time, the fund has an appetite for riskier securities. Yet the return for the past year was a loss of 1%. As for the past three years, the fund was only able to generate an annual return of 1%.
