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Open sesame for closed funds

As the bear market rolls on, many funds are reopening the doors. Now may be your chance to get in.

By Yuval Rosenberg
February 10, 2009: 5:55 AM ET

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NEW YORK (Fortune) -- The dark clouds over the stock market have presented investors with at least one silver lining: A number of mutual funds that were previously closed to new investors have reopened in recent months.

Mutual fund companies typically close funds to avoid giving managers too much cash to invest - cash that might go toward less appealing stocks, dampening overall returns. But as the bear market takes it toll and investors start to flee, many funds are reopening to provide managers with new money.

It's no surprise then that the number of funds that reopened in 2008 doubled from 2007, according to Morningstar. In many cases, existing shareholders sold off their stakes, or stock market losses left the portfolios at a fraction of their former sizes.

The list of recently reopened funds reads like a Who's Who of the investing world. Top players includes Dodge & Cox Stock, Fidelity's Contrafund and Magellan, First Eagle Global, Longleaf Partners and Sequoia.

The three funds below might not be as familiar as some of the big names above, but they are all Morningstar analyst picks. Unlike many of the more prominent names, each has outperformed its index by a handsome margin over the last five years. And each fund has seasoned management, reasonable expenses, and an investment approach that has helped separate it from the pack.

Before jumping in though, think about how - or whether - each fund fits with your portfolio. And as always, check on basics such as fees, expenses, management, and investment strategy.

Artisan International Value

Managers David Samra and Dan O'Keefe look for financially sound businesses of any size that trade at hefty discounts - typically 30% or more below their appraisal of the company's value.

Their relatively compact $833 million portfolio for the Artisan International Value fund recently held just 41 stocks, with top positions whose names included credit-reporting agency Experian, drugmaker Novartis (NVS), and Japanese credit card issuer Credit Saison.

The fund, which reopened to new investors in October, suffered a 30% loss in 2008. But that pasting was still about 17 percentage points better than its average peers.

More impressively, the fund has returned an annual average of 6.3% over the last five years, nearly five percentage points better than the MSCI EAFE (EFA) index - a record that helped Samra and O'Keefe earn Morningstar's title of International-Stock Managers of the Year for 2008.

Third Avenue Small-Cap Value

A seven-year rally in small-cap stocks to 2007 saw many small-cap funds swell in size and close to new money. Third Avenue Small-Cap Value closed in early 2006, but investors now have another chance to add the bargain-hunting fund to their portfolios.

Manager Curtis Jensen has been at the helm since the fund's inception in 1997. The fund lost nearly 35% last year, but it bested the S&P 500 (SPX) by 2.4 percentage points. Over the last decade, it has topped the Russell 2000 (RUT) index by 3 percentage points a year and beaten the S&P 500 by better than seven percentage points a year.

Like Samra and O'Keefe, Jensen looks for well-financed companies trading at deep discounts of 30% or more to their intrinsic values. He's willing to buy bargains wherever he finds them, whether it be Japanese firms like brewer and beer hall operator Sapporo Holdings, his top holding, and shopping mall operator PARCO, No. 2, or Denver-based oil and natural gas producer St. Mary Land & Exploration Co. (SM), No. 3.

Annual expenses at Jensen's $1.1 billion fund are a reasonable 1.1%, and although the minimum initial investment required is $10,000, you can buy in as an IRA with $2,500.

Allianz NFJ Small Cap Value

This fund's subadvisors at NFJ Investment Group use a "3D" strategy, focusing on "Dividends, Discipline and Diversification." Paul Magnuson and three other managers look to buy dividend-paying companies trading for low multiples of their earnings. That focus on dividends is unusual in the small-cap world, but it means the $4.1 billion fund carries a dividend yield of better than 2%.

The NFJ managers also follow strict guidelines in what they buy and sell, and they trim their stock positions as they grow so that no holding is larger than 1.5% of the portfolio. The fund recently held nearly 140 stocks, providing diversification that hopes to help to reduce volatility.

NFJ's conservative philosophy has paid off for investors by producing long-term gains - and by limiting losses in the bear market. The fund fell 27% in 2008, but that was better than some 90% of its rivals. Over the last five years, it has beaten the S&P 500 by about seven percentage points annually, placing it in the top two percent of all small-cap value offerings tracked by Morningstar.

The fund had been closed since 2003, so this is a great opportunity for long-term investors looking to buy a small-cap fund. To top of page


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Data as of Apr 17
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 6:52pm ET
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