Mutual Fund Strategies: Closed Funds For Savvy Investors

Mutual funds are a popular investment vehicle for investors of all ages, as they provide essential diversification and can strengthen returns over time. However, investors often face the challenge of closed funds, where fund managers restrict new investments due to limitations on how much cash they can handle. While this can be frustrating, there are several strategies to consider when dealing with closed mutual funds. InvestorPlace, a leading resource for mutual fund investors, offers valuable insights and tips for navigating this situation. In this article, we will explore the world of closed mutual funds, understand why funds close, and discover creative ways to access closed funds or find suitable alternatives. By the end, you should feel empowered to make informed decisions and take advantage of opportunities even when faced with closed mutual funds.

Wait for the fund to reopen

If you've found a closed mutual fund that you're interested in investing in, one option is to wait for the fund to reopen. While this may seem like an obvious solution, it's important to understand the dynamics of fund closures and reopenings to make an informed decision.

Firstly, it's important to note that funds don't always remain closed forever. There have been instances where well-known investment firms, such as Vanguard, have reopened their top-performing closed funds to investors. For example, Vanguard Dividend Growth VDIGX, a highly-rated mutual fund, reopened to new investors in 2019 after being closed for over three years.

When a mutual fund closes, it typically does so to protect its existing investors. As funds experience a surge in performance, they attract an influx of new investors and cash. This can lead to fund managers facing challenges in deploying the new capital effectively, potentially deviating from their investment strategy. By closing the fund, managers can maintain the fund's strategy and protect investors.

However, funds may reopen after a period of poor performance or large outflows of investors selling their shares, which reduces the fund's asset size. In such cases, fund managers may feel they can effectively manage additional investments and choose to reopen the fund.

It's worth noting that funds are not required to disclose their closing specifics, and finding information about fund closures can be challenging. If you're interested in a particular fund, it's essential to stay informed through reliable sources, such as the fund company's website or financial news platforms. Additionally, you can utilise resources like Morningstar's Quote page or AAII's Fund Evaluator to check the status of a fund and determine if it's open or closed.

While waiting for a fund to reopen can be a viable option, it's not the only strategy to consider when dealing with closed mutual funds. Other approaches, such as exploring similar funds with comparable management styles or utilising "back door" methods, can also be explored. However, it's crucial to thoroughly research and understand the risks and complexities associated with each alternative before making any investment decisions.

Go through the fund's back door

Going in through the "back door" is an option if you are unsure if the fund will ever reopen. This method can be summed up as follows:

• Ask your fund company for a "Transfer of Shares to New Owner" or "Change of Ownership" form. Most fund companies have one of these forms.
• Find a trusted friend or family member who is already a shareholder in the fund. Give them enough money to meet the fund's investment minimum.
• Once the money is invested, they can transfer the appropriate number of shares of the fund to you.

This strategy is similar to someone transferring shares of IBM or Google into your name. It's important to note that not all funds will allow this, and you may have to navigate a lot of rules. However, this technique has been successfully used by some investors with the Vanguard Fund Family over the years.

Find the fund's long-lost twin

If you've waited outside the front door, gone around the back, and knocked only to find that the fund is closed with no loopholes, no windows, and no way to get in on the profits, there's still another option: start looking for the fund's long-lost twin.

For example, Vanguard Capital Opportunity (MUTF: VHCOX), run by PRIMECAP Management, is one of my favourite all-time funds. Unfortunately, it closed to new investors back in 2004. However, PRIMECAP also manages its own funds. PRIMECAP Odyssey (MUTF: POGRX) and the PRIMECAP Aggressive Growth fund (MUTF: POAGX) are a close match to Vanguard Capital Opportunity.

Clone the management style

If you can't find a similar fund managed by the same team, you can still find a fund that's just as good but managed by another team. This is the fourth option for investors to get in on the action of closed funds.

In 2008, when the market was going haywire and the only refuge was overseas, the author of the InvestorPlace article looked for a team that could match the performance of the closed Vanguard International Explorer (MUTF: VINEX). They found a group of managers at T. Rowe Price that ran the T. Rowe Price International Discovery (MUTF: PRIDX) fund, which ended up slightly outperforming VINEX. This proves that if you can match the management style, you don't need to break into the fund.

The biggest mistake you can make is choosing a mutual fund because of its superior track record only to discover that the manager who produced those returns has been replaced. Mutual funds change managers all the time, but they keep advertising the fund's track record. It takes 10 years before a track record is long enough to say whether a manager has exhibited investment skill. You want managers who have outperformed both the S&P 500 and the benchmark for their category. For example, if you are looking at a healthcare-fund manager, you want one that has outperformed the S&P 500 and the healthcare index.

Out of over 7,000 U.S. equity mutual funds in Morningstar's database, only 23 passed muster, of which 17 are open to new investors. Here are five closed mutual funds with managers who pass muster:

• Brown Capital Mgmt Small Co In
• Eaton Vance Atlanta Capital SM
• Fidelity Growth Company
• PGIM Jennison Health Sciences
• PRIMECAP Odyssey Aggressive Gr

If you don't already own shares in these funds, you'll need to find someone who does. If you own shares in at least one of these closed funds, you will at least have something to trade.

Choose the manager, not the fund

When it comes to investing in closed mutual funds, one important consideration is choosing the right fund manager. Here are some reasons why selecting a skilled and experienced manager is crucial, along with some tips on how to identify and evaluate fund managers:

The Importance of Choosing the Manager, Not Just the Fund:

• Superior Track Record: A fund manager with a proven track record of strong performance can significantly impact the fund's success. Look for managers who have consistently outperformed relevant benchmarks, such as the S&P 500 or industry-specific indices.
• Consistency and Skill: It takes time to establish a truly impressive track record. Aim for managers with at least a 10-year track record of outperforming relevant indices. This helps ensure that their success is due to investment skill rather than luck.
• Stability and Continuity: Mutual funds may change managers, which can impact the fund's performance. Choosing a fund with a manager who has been with the fund for a considerable period can provide more stability and continuity to the fund's investment strategy.
• Active Management: Closed-end funds are typically actively managed. Selecting a skilled and experienced manager becomes even more critical in this case, as their decisions will directly influence the fund's performance.

Tips for Evaluating Fund Managers:

• Research Manager Tenure: When considering a closed mutual fund, find out how long the current manager has been managing the fund. Look for managers who have been with the fund for a significant portion of its successful track record.
• Analyze Performance History: Evaluate the fund's performance over an extended period, such as 5 or 10 years. Compare it against relevant benchmarks to identify managers who consistently deliver superior returns.
• Consider Manager Turnover: Check if the fund has had multiple managers over its history. Frequent changes in management may indicate higher risks or instability in the fund's investment strategy.
• Review Manager Qualifications: Assess the manager's educational background, industry experience, and investment philosophy. Look for managers with relevant qualifications, a strong track record in the specific industry or sector, and a clear and consistent investment approach.
• Scrutinize Fund Prospectuses: Fund prospectuses often provide information about the fund managers' qualifications, experience, and investment strategies. Read the fine print to understand the fund's management structure and any potential changes in leadership.
• Evaluate Manager Specialization: Some fund managers specialize in specific sectors or industries. If you're interested in a particular sector, look for managers with expertise and a successful track record in that area.
• Consider Manager Recognition: While awards and industry recognition are not the sole criteria, they can indicate a manager's exceptional performance and peer recognition. Keep an eye out for fund managers who have received accolades for their investment strategies and returns.

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