Fund Reopenings Offer Rare Opportunity

During the bull market that had begun in 2003, dozens of funds closed, refusing to accept new shareholders. Fund managers took the step to avoid being overwhelmed by cash inflows. These days, the flood of money has dried up, and funds that had been closed are now reopening. So far this year, 72 funds have reopened, almost double the figure for 2007, according to Morningstar.

The flurry of openings could be a positive omen. Time and again, upticks in fund openings have signaled market bottoms, and fund closings have occurred near market peaks. But many investors ignore the indicators, buying and selling at the wrong times. Today, shareholders are withdrawing record amounts of cash from funds. Instead, long-term investors should consider buying shares of newly reopened funds.

Funds often close after periods of hot performance. With investors racing to buy shares, fund managers worry that their portfolios will become bloated. If that happens, funds can no longer trade nimbly, and performance records can lag.

When companies announce closings in advance, many investors scramble to buy before the deadline. But most often, shareholders have been disappointed with their last-minute purchases. According to a study by Morningstar, funds tend to slip after they close to new investors. The researchers looked at returns for three years before and after closings.

On average, the funds that closed had outdone more than 80% of their competitors during the previous three years. But after shutting the doors, the once-hot funds slipped into the middle ranks. This could occur because investors tend to jump aboard funds that are peaking and about to enter periods of being out of favor.