Investor, Keep Out
If you were thinking about investing in the T. Rowe Price Small-Cap Value Fund, you've thought too long. On Mar. 4, the fund closed its doors to new investors. The reason: The $380 million fund had taken in $100 million in new money alone this year, straining its ability to invest in the small, illiquid stocks in which the fund specializes.
The time has also passed for getting into the Lindner Dividend, Monetta, and Strong Common Stock funds, and it is running out for others. With mutual funds raking in record cash, six closed or announced closings in the past five weeks, and more are expected (table).
In closing a fund, the manager forgoes fees that could have been collected from new investors. But what the management hopes to maintain is the investment performance for the existing shareholders. "It's one of the most pro-shareholder things a fund company can do," says Don Phillips, publisher of Morningstar Mutual Funds.
What's prompting the closings is just too much money chasing too few investment opportunities. Eric Ryback, who runs the $1.2 billion Lindner Dividend Fund, said $20 million a day was coming in, and most was ending up in Treasury bills earning 3% while he searched for better places to invest it. Says Ryback: "I can't invest money at 3% and continue to pay out the 7% yield that I'm trying to give to my shareholders." Even Fidelity stopped accepting new investors in its Low-Priced Stock Fund on Feb. 9, when its assets hit $2.8 billion--about half of which was sitting in cash.
BIG RUSH. Janus Twenty Fund also cut off new investors, even though it buys large-cap stocks. That's because the fund deliberately limits its portfolio to 20 to 30 securities, while many large funds may own 100 or more. An unchecked torrent of cash could force Janus Twenty into changing the investment strategy that made it successful.
When funds shut the money window, they usually have something else to sell. Strong Funds point investors toward the Strong Opportunity Fund, which has the same portfolio managers as their closed fund. But there is a difference. The Opportunity Fund, like many alternatives to shuttered small-company funds, invests in medium-cap stocks.
Ironically, announcing an upcoming closing can unleash the flood of new money the managers were trying to avoid. In June, 1991, Janus Funds said it would close the then-$745 million Janus Venture Fund on Sept. 30, 1991. Investors stormed in, and by the deadline, its assets had ballooned to $1.2 billion. With Janus Twenty, the management company gave six weeks' notice and stopped sending prospectuses that day. Still, some $500 million came in the interim.
Now, funds that announce closings don't give much notice. Strong Common Stock set its Mar. 19 cutoff on Mar. 10. Lindner Dividend gave new investors a week to get in, and $100 million poured in during that week. One under-the-wire investor, Chicago retiree Dolores Lindsey, drove five hours to Lindner's St. Louis headquarters because by the time she learned of the closing, it was too late to invest by mail. "I had been watching that fund and thinking about moving my money there," she says. But the deadline forced her hand.
WATCH LIST. Existing shareholders in newly closed funds can usually continue to make additional investments. But folks thinking of investing anew, especially in small-cap funds, may have to act quickly. Fund analysts believe the 19-month-old Oakmark Fund, up 49% last year, is ripe for closing, since it has swelled to $610 million in assets. Robert Sanborn, Oakmark's manager, says there's no plan to close, but if the current inflows of $2 million a day continue, "it could happen this year." And Mutual Discovery Fund, the new Michael Price fund that opened last December and already has some $130 million in assets, will close when it hits $300 million. Two large funds run by Price, Mutual Shares and Mutual Qualified Fund, have been closed to new investors for years.
Another name on the watch list is the $100 million FAM Value Fund. It delivered a 25% total return last year, and its assets have more than doubled since Jan. 1. George Chelius, FAM's marketing director, says the fund will close if investment performance or customer service falters, "but so far neither is a problem." Still, he worries about getting inundated with more money. "I'd hate to see our name in print again," he sighs. "It makes the phones go crazy."