ONE OF THE BEST mutual funds in history has just started taking on new investors, but that doesn't mean you'll want to buy it.
Longleaf Partners fund, which has a reputation worth more than its $3.6 million in assets, reopened to new investors last week. Over the past 10 years, the fund has gained about 15.75 percent per year, which beats virtually all of its peer funds in either the Morningstar or Lipper databases.
What's more, Southeastern Asset Management, which runs the Longleaf funds, pretty much sets the gold standard for an investment firm.
Management and employees are the biggest shareholders in the Longleaf funds, which have made the company downright "pro-shareholder."
So what's not to like about this fund?
That's the question every investor should ask whenever a successful fund reopens to new investors. Longleaf Partners is just the latest example -- Putnam reopened its New Opportunities fund, brought in $1 billion in 14 days, and closed the fund again last week -- but it's a good look at how to size up reopenings.
Funds stop taking new accounts for several reasons, notably to control growth -- which allows a fund to stay true to its investment objective -- or because the market isn't filled with the kind of buying opportunities the fund typically pursues.
Some funds never reopen. Among those that do, however, the reason usually is that management wants to pursue buying opportunities, ease cash-flow problems caused by downturns or simply keep its management fees high.
No matter the reason, fund companies always put a positive spin on reopenings, and it can be hard to see through the hype.
Longleaf Partners described how a few additional stock positions could lower the fund's "price-to-value" ratio.
But price-to-value isn't some standard, recognizable indicator. It's a measure Longleaf managers make up based on their appraisal of a stock.
What's more, Longleaf Partners' recent performance has not lived up to its illustrious past, due largely to the pursuit of a value approach -- seeking undervalued companies that will rise in price -- that has been out-of-favor for a few years now.
The fund gained 2.2 percent last year, a return so paltry that its longer-term, five-year performance record trails that of its average peer. (By comparison, Putnam New Opportunities reopened after having a big year in 1999.)
Even with recent poor performance, respected funds that reopen lure investors like ants to a picnic. The question is whether you are going to get a full banquet or just the crumbs.
To make that determination with any reopened fund, answer a few key questions:
Is reopening consistent with the fund's investment strategy? Will it change the fund?
If new money will force a fund manager to buy assets that haven't typically been in the portfolio before -- to move from midcap to large-cap stocks, for example -- the glorious track record becomes irrelevant, because the fund is changed.
Longleaf Partners, for example, holds 24 stocks and is planning to dump one and use new moneys to buy two more. New money or not, strategy won't change; the fund remains concentrated and retains a buy-and-hold outlook.
Is reopening good for new investors?
Some funds reopen because they can use new money to avoid having to sell stocks to meet redemptions. That's good for current shareholders, but it doesn't necessarily bode well for newcomers unless the fund has honest rebound potential.
For Longleaf, that means believing that the management and value investing can both rebound. History says they should, but history has been wrong about a lot of managers whose funds have fallen and can't get up.
Am I riding the wave, or acting the contrarian?
If the fund is reopening to get in on a hot market -- as New Opportunities did -- then you need to decide whether you feel strongly that current market conditions will continue.
If the fund has been in the dumps, like Longleaf Partners, you need to decide whether it's positioned for a rebound.
Either way, be comfortable with the position you choose.
Might the fund close again?
The fund should protect shareholders from the problems too much growth can cause. That explains why New Opportunities reopened for two weeks, and why Longleaf Partners could close after buying just two new stocks. When any fund reopens, ask its representatives why, when and if the fund might close again.
"Good funds reopen with a plan and have some idea of when or why they will close again," says Russ Kinnell, mutual funds editor at Morningstar.com. "It's when the fund doesn't seem to have any plan other than to make a lot of money for management that you really need to worry about buying when it reopens."
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at firstname.lastname@example.org or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.