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Winning funds that close
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December 21, 1999: 6:26 a.m. ET
As assets soar in a market on fire, some top funds have shut their doors
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - The hard truth about the hottest mutual funds is that by the time you find out about them, they are often closed to new investors.
And with some parts of the market on fire lately, there is no shortage of funds shutting their doors.
Most recently, investors have been throwing money at small- and mid-cap stock funds as returns have skyrocketed in 1999, said Russ Kinnel, an analyst at fund-tracker Morningstar. As assets swell, it gets harder for funds that invest in smaller stocks to deliver top returns.
For example, Van Kampen Aggressive Growth Fund has soared nearly 100 percent year to date as of Dec. 15, according to Morningstar. Its assets have nearly tripled in that time to almost $1 billion, Morningstar said.
Garrett Van Wagoner in November closed two of his top-performing funds, Van Wagoner Micro-Cap and Van Wagoner Emerging Growth, for the same reason, Morningstar said.
American Century and AIM funds also closed funds that were in the spotlight, Kinnel said.
Managers are growing cautious
"Managers are being more cautious than in the past,” said Burt Greenwald, a mutual-fund analyst in Philadelphia. "It’s the size of the assets that come in rapidly in the wake of high performance. It’s difficult as hell to keep up that level of performance.”
Vanguard closed its health-care fund in February because the company was worried about so-called hot money. The fund’s asset base exploded to about $10.4 billion, Morningstar said. It recently reopened the fund, but raised the minimum required investment from $3,000 to $10,000 to discourage the short-timers.
Vanguard also started in April a 1 percent redemption fee on shares sold in less than 5 years.
"We believe these policies will protect the interests of the fund’s long-term shareholders by making the fund unattractive to short-term investors,” said Chairman John Brennan.
Kinnel found that funds have better returns if they close while their asset base is still relatively small.
In one study Kinnel did in August, he found that for every fund that improved after closing, there were three more funds that suffered. He looked at funds that closed between January 1980 and June 1996.
"The explanation is hot funds usually cool off,” Kinnel wrote in his analysis.
Fidelity’s New Millennium Fund, headed by Neal Miller, may not have had such stellar returns (five-year annualized returns of 40 percent, for example) if it had not closed, Kinnel added.
"I can’t imagine New Millennium would be as good if it were a $10 billion fund,” Kinnel said.
Should you chase a closing fund?
While some parts of the market have sizzled, other sectors have been ice-cold. So while some funds are closing, others are reopening to lure new investors in. Virtually all small-cap value funds are open, Kinnel said.
"The mystique around closed funds is the exclusivity,” Kinnel said. "One of the lessons is you don’t have to rush in simply because a fund is closing.”
Mark Groesbeck, a certified financial planner at Stanford Group in Houston, said he advises clients not to rush in when a fund closes.
"Funds close because they have so much cash they can’t put it to work fast enough,” Groesbeck said.
But, if a fund Groesbeck recommends is closing, he might encourage his clients to buy before the doors shut.
For example, Groesbeck has recommended Van Kampen American Value Fund, which has closed, reopened and closed. He likes the fund’s long-term track record and said it has a lower expense ratio than its peers at 1.49 percent.
"To me, a fund closing in itself is not a buy order.” 
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