I received a notice the other day from one of the mutual funds I own. It seems that the Artisan International Value (ARTKX) fund, which recently counted Diageo
I only have a small chunk of my nest egg invested in this fund, and it's one I'd consider adding more money to in the years to come, as I accumulate more moola. So why am I smiling about its closing? Well, one reason is that the fund is only closing to new investors (actually, to certain new investors). As an existing shareholder, I'll be able to invest additional amounts whenever I wish. And some new investors can come aboard, too, if the fund is a choice in their 401(k) accounts.
A bigger reason to smile is this: As a fund grows bigger, closing is often the right thing to do, serving shareholders best. Permit me to explain.
The problem of size
Imagine that you run a mutual fund, and that you collect 1% in fees from shareholders each year. Sure, you want the fund to do well, to serve your shareholders well and to attract more shareholders. So you do the best job you can, hunting out promising investments.
Of course, as we individual investors know, there are only so many Grade-A investment ideas that we can come up with. If you scour the entire market and find 50 outstanding stocks and 150 pretty good ones and 1,000 decent ones, would you want to invest your money in just the 50 top ones, or the top 200 ones, or the top 300 ones? I hope you see that you're most likely to do well investing in just your best ideas, not the also-rans.
But as your fund grows, partly because of more money coming in from new investors, investing it all becomes more difficult. If your fund's total value is $100 million, you could invest an average of $2 million in each of 50 companies. If your fund's value is $10 billion, then you'd be parking $200 million in each of the 50 companies. But that's not always possible, especially if you want to invest in some small companies.
Consider, for example, the electronics contract-manufacturer Plexus
In such a situation, fund managers often end up just buying into more and more companies -- and the end result is dilution of performance. (And yes, this problem is more pronounced for funds that try to focus on smaller companies.)
There's a conflict of interest afoot in this situation, too. Remember that 1% annual fee that you, the fund manager, collect? Well, the bigger the fund grows, the more money you'll make. When it's a $100 million fund, you'll reap $1 million. When it's $10 billion, you'll collect $100 million -- that's quite a difference, no?
So you've clearly got an incentive to let the fund swell in size, even if it means performance will dip, as you can't concentrate your investments as much as you'd like. In such situations, it's a strong and responsible mutual fund manager who decides to close the doors.
Many great funds have closed their doors to new investors, and some even refuse additional sums from existing shareholders. Every now and then, a closed fund will reopen, either for a while or indefinitely. The Vanguard Energy Fund (VGENX), for example, which invested in the likes of Total SA
What to do
So how should you view closings? Well, they're generally a good sign, even though they're no guarantee of good performance in the fund's future. If a fund you want to buy into is closed, keep an eye on it, for it may reopen. If a fund you plan to buy into one day is open, keep an eye on it, lest it close before you buy in.
And in the meantime, keep looking for top-notch funds, because there are more than a few out there, and they can make you rather wealthy over the years. Learn more in these articles:
- The Next Great Mutual Fund
- The Case for Mutual Funds
- The Perfect Mutual Fund Portfolio
- The Finest Investment Vehicle Ever Designed
Looking for funds?
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Longtime Fool contributor Selena Maranjian owns shares of no company mentioned in this article. For more about Selena, view her bio and her profile. Tyco International and Vodafone are Motley Fool Inside Value recommendations. Diageo and Total SA are Motley Fool Income Investor recommendations. The Motley Fool is Fools writing for Fools.