Fund Closings Indicate Van Wagoner Has Learned From Mistakes

The move ensures that asset bloat won't sink the returns of his Emerging Growth and Micro Cap funds.
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The sound associated with Garrett Van Wagoner's mutual funds lately has been a persistent sizzle. But today, it is a sharp

thwack!

, as

Van Wagoner

slams the doors on his

(VWEGX)

Emerging Growth and

(VWMCX) - Get Report

Micro-Cap funds.

The two funds, both of which boast triple-digit returns this year, close to new investors at the end of business Monday.

The closings should prevent a recurrence of the thud investors heard in 1997, when the cash-saturated funds exhibited all the grace of a midair goose collision before plummeting back to earth.

"It's a great move. It shows that he's actually looking out for the current shareholders," says Edward Foster, research director at

Fabian Investment Resources

in Huntington Beach, Calif. "He could probably accept another $1 billion into these funds if he really wanted to, and he could make an additional $200,000 a year

in advisory fees off of that. So I think it's great when these guys actually do close these small cap funds, because they're too hard to manage when they get large."

Emerging Growth is the fifth-best performing fund year to date, with a 214% return, according to

Lipper

. Micro-Cap is returning 156% and is ranked in the top 25 of all funds.

When Van Wagoner launched these funds in late 1995, investors tripped over their check books to send him money. That was largely due to Van Wagoner's success in managing the

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Govett Smaller Companies fund, which posted a 69.1% return in 1995.

By May of 1996, Emerging Growth ballooned to $845 million in assets, 100 times more than the $8 million it started with just five months earlier, according to Boston fund consultant

Financial Research

. Micro-Cap enjoyed similar growth, swelling from $2.3 million in January of 1996 to $153 million at the beginning of 1997.

While the funds' assets swelled, their returns suffered from a pronounced case of shrinkage. After posting a 26.9% return in 1996, Emerging Growth suffered a negative 20% return in 1997, according to

Morningstar

. Micro-Cap lobbed a similar brick, with a negative 19.8% return after returning 24.5% a year earlier.

Of course, these ups and downs have become synonymous to investing with Garrett Van Wagoner. And Van Wagoner, the manic manager, took more than a little heat for not closing the funds to new money before they got too big to handle.

Investors pulled their usual lemmings-and-sparrows imitation and flapped together toward the exits once poor numbers started showing up on their statements.

Despite a

big 1998, both funds were still suffering net outflows as late as February of 1999. And despite Micro-Cap's triple-digit year-to-date return, investors pulled $2.9 million out of the fund in September, perhaps smartly taking money off the table while the getting is still good.

If Van Wagoner's returns swoon again, it won't be because he's making the same mistake twice.

At the end of September, Emerging Growth had $603 million, while Micro-Cap had $140 million. While today's close will apply only to new investors, the firm has pledged to reject all investments when the funds reach $1 billion and $250 million, respectively.

"He could have repeated history again, but he's not going to let that happen," says Fabian's Foster. "He actually learned from it, and that's how the world works. If people don't learn from their errors, you want to avoid them. But if they do learn from them, you stick with them. And I think he learned."

Hopefully, for investors lucky enough to be in the funds already, the only sound they'll hear from the funds in the future is a steady chug to higher returns.