Unlocking Vanguard's Closed Funds: A Guide To Smart Investing

Investing in closed Vanguard funds can be a challenging task. Vanguard is known for its low-cost funds and large fund selection, making it an attractive option for long-term and retirement investors. However, its basic trading platform and high investment minimums may deter beginner investors. When a Vanguard fund closes, it may do so only to new investors, or it may close completely, meaning that no one can put any more money into the fund. There are a few strategies to consider if you're looking to invest in a closed Vanguard fund. One option is to wait for the fund to reopen, as some Vanguard funds have done in the past. Another strategy is to go through the back door by finding a current investor who is willing to transfer shares to you. Additionally, you can look for similar funds managed by the same team or by different teams. It's important to note that investing in closed funds may carry greater risks and volatility.

Wait for the fund to reopen

If you're interested in investing in a Vanguard fund that's currently closed, one option is to simply wait for the fund to reopen. While it's not always a sure thing, Vanguard has a history of reopening its top-performing closed funds. For example, in 2019, Vanguard reopened its Dividend Growth Fund, which had been closed to most new accounts since 2016. More recently, in 2024, Vanguard reopened its PRIMECAP Fund and PRIMECAP Core Fund, which had been closed since 2004 and 2009, respectively.

When a fund is closed, it generally falls into one of two categories: either it's closed to new investors only, or it's closed completely. If a fund is closed to new investors, existing investors may still be able to add more to their investment. However, if a fund is closed completely, no one can put any more money into it.

Funds may close for a variety of reasons. One common reason is excessive inflows, which can make it challenging for fund managers to invest in line with the fund's strategy and lead to higher cash levels and inefficient capital management. Funds may also close to maintain exclusivity or due to poor performance when a fund is winding down.

When a fund closes, it's not necessarily a performance-related issue, and current investors shouldn't panic. In fact, closing a fund can often help improve its operational efficiency and performance. Vanguard carefully evaluates its active fund lineup to monitor investment capacity and ensure that cash flows into a fund do not affect its ability to meet its investment objectives. If you're an existing investor in a closed fund, you can always reach out to Vanguard for more information about the closing.

While waiting for a fund to reopen can be a valid strategy, it's important to keep in mind that it's not guaranteed, and there may be other opportunities to consider in the meantime.

Go through the 'back door'

If you're unsure whether a closed fund will ever reopen, going through the "back door" is a good option. Here's how to do it:

First, ask your fund company for a "Transfer of Shares to New Owner" or "Change of Ownership" form. Most fund companies, including Vanguard, have this form. Then, 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, and once it's invested, they can transfer the appropriate number of shares of the fund to you. It's important to note that not all funds will allow this, and you may have to navigate a lot of rules, but it has been known to work with Vanguard funds.

This method is particularly useful if you don't know whether a closed fund will ever reopen. It's also a good option if you're locked out of a fund because you don't already have an account. While some funds only close to new investors, meaning existing investors can continue to put money in, others close completely, meaning no one can put any more money into the fund.

Find the fund's 'twin'

If you're locked out of a closed fund, one option is to start looking for the fund's long-lost twin. In other words, look for a clone of the closed fund. For example, Vanguard Capital Opportunity (MUTF: VHCOX), run by PRIMECAP Management, is one of my favourite funds. Unfortunately, it closed to new investors back in 2004. However, PRIMECAP also manages its own funds, and PRIMECAP Odyssey (MUTF: POGRX) and the PRIMECAP Aggressive Growth fund (MUTF: POAGX) are a close match to Vanguard Capital Opportunity.

Even if you can't find a similar fund managed by the same team, you can often find a fund that's just as good but managed by another team. For example, in 2008, when the market was volatile and the only refuge was overseas, I looked for a team that could match the performance of the closed Vanguard International Explorer (MUTF: VINEX). I 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.

Clone the management style

If you can't find a similar fund managed by the same team, you can often find a fund that's just as good but managed by another team. This is what is meant by cloning the management style of a closed fund.

For example, in 2008, when the market was volatile and the only refuge was overseas, an investor 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 a management style, you don't need to break into the fund.

Knowing a fund's investment style can help you understand how it might fit into your portfolio. This information can also help you build a portfolio that's broadly diversified across markets and less susceptible to sharp swings in any one market area.

Vanguard uses a 9-box grid called a "style box" to show how their domestic stock fund holdings are distributed by primary investment style (growth, value, or blend) and market capitalization category (large-, mid-, and small-cap companies).

Understand the risks

Investing in closed Vanguard funds carries a variety of risks that you should be aware of before proceeding. Understanding these risks will help you make informed decisions and manage your investments effectively. Here are some key points to consider:

Closed funds are a common occurrence in mutual fund investing, including with Vanguard funds. Funds may close due to various reasons, such as excessive inflows, low performance, or low demand. When a fund performs well, it can attract a large influx of cash from investors, which can lead to challenges for fund managers in aligning investments with the fund's strategy. This can result in higher cash levels and inefficient capital management, impacting the fund's performance.

Another risk to consider is the impact of closing on existing investors. While closing a fund to new investors can help manage operational activities and improve performance, it may also restrict existing investors from making additional investments in the fund. In some cases, closed funds may stop taking investments from current investors as well, limiting their ability to increase their position. Therefore, it is essential to review the fund's specifics and understand your investment options as an existing investor.

Additionally, closed-end funds can be less liquid and more volatile than open-ended funds. Closed-end funds, in particular, have the ability to use leverage, which introduces greater risk but also the potential for greater rewards. This leverage can magnify losses during market downturns, leading to higher volatility in share prices. As an investor, you should carefully evaluate your risk tolerance and investment goals before considering closed-end funds.

Furthermore, the pricing and trading dynamics of closed-end funds differ from those of open-end funds. Closed-end funds trade throughout the day on a stock exchange, and their trading price may be higher or lower than the net asset value (NAV). If the trading price is higher, investors pay a premium, potentially acquiring an investment worth less than the purchase price. Conversely, if the trading price is lower, investors can purchase the fund at a discount.

Lastly, it is important to recognize that closed-end funds are not widely followed by Wall Street firms or owned by institutions. They tend to receive less research coverage over time, which can impact the level of information available for investment decisions. As a result, closed-end funds are typically considered a tool for relatively sophisticated investors.

Understanding and carefully considering these risks will enable you to make more informed decisions when investing in closed Vanguard funds or any other closed funds. Conduct thorough research, assess your risk tolerance, and seek appropriate financial advice to ensure that your investment choices align with your financial goals and risk appetite.

Frequently asked questions