Mutual funds often turn away new money once they have grown so big that the fund manager has difficulty putting additional capital to work in a reasonable amount of time.
While that's generally a good thing for existing investors, it may give them a false sense of security. Just because a fund it closes its doors to new money doesn't mean it won't continue to gather significant assets.
Funds that advertise themselves as being closed often continue to accept money from existing investors. This is referred to as a "soft" close. It isn't as effective at stemming inflows as a "hard" close, in which funds stop accepting money from both new and existing investors.
And some fund closings are softer than others. Christine Benz, director of mutual fund analysis at Morningstar, says that nominally closed funds often allow investment advisers who already have some client assets in the fund to add new client assets as well.
In addition, some "closed" funds that remain widely available on 401(k) platforms may continue to see substantial inflows.
Benz cites the
Fidelity Diversified International Fund (FDIVX) and the
Dodge & Cox Stock Fund (DODGX) as two examples of funds that have closed but continue to see significant inflows. Both shut their doors to new money in 2004 but still managed to claim a spot on the list of best-selling funds in 2006, according to data from Financial Research Corp.
When the Fidelity Diversified International Fund closed in October 2004, it had about $18.7 billion in assets. The following year the fund pulled in $5.15 billion of new money. That was down from $6.398 billion in 2004 but still quite substantial. And in 2006 the fund's inflows rose to $6.6 billion, despite being closed. The fund now has total assets of more than $47 billion, and it was the ninth-best-selling fund in December, according to FRC.
The Dodge & Cox Stock Fund closed to new investors in January 2004, when it had $29 billion in assets. Though the fund's inflows tapered off a bit once it closed, they certainly didn't stop. For 2004 as a whole it pulled in $7.15 billion. Inflows subsequently dropped to $4.70 billion in 2005 and $4.25 billion in 2006. But the fund now has more than $66 billion in assets and ranked 15th on FRC's list of best-selling mutual funds in December.
No one at Fidelity was available to comment for this story. Representatives at Dodge & Cox declined to comment, referring to the fund's prospectus, which is available on the company's
Lynette DeWitt, associate director of retail investment markets for FRC, says it's not just whether a fund remains available in 401(k) plans that determines how much new money it attracts after closing, but the number of 401(k)s that offer the fund and how many participants they have.
DeWitt said funds can also attract large sums when investors rush into them in anticipation of a closing.
Of course, it doesn't necessarily matter how much new money a fund attracts, so long as its performance doesn't suffer. Both Fidelity Diversified International and Dodge & Cox Stock have continued to log returns in line with or better than their benchmarks. Fidelity Diversified International has returned an annualized 19.35% over the past three years, 0.59 percentage point less than the MSCI EAFE, according to Morningstar. Dodge & Cox Stock has three-year annualized returns of 15.01%, 4.55 percentage points above the
But not all funds can handle so much new money so well, and that is why investors need to keep a close eye on the returns of popular offerings.