Two years ago, Jon M. from Pittsford, N.Y., sat down to do some research on international small-cap funds, as that was what he wanted to do with his annual Roth IRA contribution. Just when he found a fund he really liked, he looked at the fine print and discovered that it was not open to new investors.
The manager of that fund, Oakmark International Small Cap I (OAKEX), wound up winning Morningstar's International Fund Manager of the Year Award in 2006, thanks to a gain of nearly 35 percent, but then it suffered through a dismal 2007, losing 8 percent of its value, finishing at the very bottom of its peer group for the year.
And as 2007 ended, Oakmark announced that the fund and one of its sisters, Oakmark International (OAKIX), would reopen to new shareholders.
Having missed out on the big gain and the disappointing loss, Jon remains intrigued at the possibility of buying into the fund that first attracted his interest in the international small-cap space. "Is this a good news story, where I can finally get into a great fund," Jon asks, "or is it a bad news story, where things will go from bad to worse?"
That's precisely the question every fund investor should ask when confronted by a fund that is re-opening its doors to investor monies. Whether it is the Oakmark funds, Tweedy Browne Global Value - another longtime media darling that just started taking cash again - or any other offering, investors need to view a reopening with suspicion, because it's more a mixed bag than a blessing.
At first blush, reopening to new investors always looks like a good deal. Funds stop taking cash for several reasons, notably to control growth or to avoid feeling forced to buy new stocks when the market lacks the buying opportunities the manager favors.
Some issues never reopen. A decision to unlock the doors, therefore, may signal that management wants to put some good ideas to work, or that it believes the fund may be in the market's next sweet spot.
Or it could mean that management wants to ease cash-flow problems caused by downturns, or it could be motivated by simple greed. Fund firms get paid a slice of the assets they manage. When market conditions shrivel those assets, using a proven winner to bring money back into the fold pumps more dollars directly to the firm's bottom line.
By itself, increased asset flow is not likely to turn around ho-hum performance. There is limited analysis of funds that reopen - and that information is inconclusive - but there's no reason to expect a quick blast-off.
"If everything has been great with a fund, it's probably not going to open again, so you know you are buying a fund that probably has suffered through some hard times," says Russel Kinnel, director of mutual fund analysis at Morningstar Inc. "Unless you owned the fund, how it did while it was closed is unimportant. All that matters is what happens next, and if you can expect the fund to return to glory."
With that in mind, here are three questions that help to evaluate a fund that is reopening:
Is reopening consistent with the fund's strategy and good for new investors?
If management sees opportunities now that its preferred investments are out of favor, that's good. But if the fund simply wants new money to stem the tide of what is leaving, that's hardly a compelling reason to write a check.
Try to figure out why the fund closed in the first place - look for press releases on the company Web site or ask its phone representatives - and see if reasons given for reopening are consistent with the initial motives for closing.
Oakmark International Small Cap, for example, has been closed since 2002, and outflows in recent months have made it harder for manager David Herro to pursue the good investment opportunities he sees around the world. Given that Herro's stock-picking style has delivered tremendous long-term returns - in spite of the recent declines - some long-lens investors may like the idea of giving him new ammunition.
Am I riding the wave or acting contrarian?
Buying a fund that is reopening tends to be a bit contrarian, if only because the funds opening these days are inclined to have seen performance cool recently. During the technology boom of the late 1990s, however, some popular funds opened just to pursue quick-hit, go- with-the-flow opportunities.
If you're looking at a fund that has been on the downswing, it's more important to see how the fund fits into your portfolio than to hope that it can return to past glories.
Could the fund close again?
Sometimes, a fund will grab some cash, put it to work and then shutter itself again. Unless management is giving you signals that it is trying to take advantage of specific opportunities, don't rush in. Instead, consider the fund more for its potential than its past.
Charles Jaffe is senior columnist for MarketWatch and host of Your Money Radio. His postal address is: Box 70, Cohasset, MA 02025-0070.