Reopened Small-Stock Funds Could Be an Opportunity -- or a Sucker Trap

A couple of years ago, every week or two would bring the announcement that a small-cap fund was closing, sending investors scrambling to get in before the gates slammed shut. But last fall's bear market took a little of the exclusivity out of the small-stock club. With assets dwindling and shareholders headed for the same doors many had just rushed to get in, small funds are no longer playing hard-to-get.

Talk about victims of their own success. After three solid years of outperformance at the start of the decade, investors flocked to small-cap funds, their cachet rising with each closing -- or even just the threat of closing. The trouble is, fund companies barred the doors just in time for the market to collapse. Small-caps have struggled to mount a sustained advance since 1994. An aborted rally in 1997 lured some investors back in, but apparently not the folks with staying power. "Some hot money flowed in -- and then it flowed right back out again," says Scott Cooley, an analyst with fund tracker Morningstar. Assets in (OAKSX Quote)Oakmark Small Cap fell from roughly $1.5 billion to $600 million in a just few months last year, he notes.

Preston Athey, manager of the (PRSVX Quote)T. Rowe Price Small-Cap Value fund, says he was getting redemptions for six months when he reopened the fund in November. "For two weeks I had money coming in; then I started seeing redemptions again." Fidelity, meanwhile, says assets in its (FLPSX Quote)Low-Priced Stock fund fell from $12.1 billion last April when it closed to $7.8 billion at the end of February. ...