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In 2007, equity and hybrid funds closed to new investors generally underperformed those that were still accepting new participants, calling into question conventional industry wisdom that closing funds can help keep returns higher.

Open-end funds voluntarily close their doors to new investors all the time, which at first blush may seem out of character for an industry in which more money is almost always seen as better than less. The usual logic is that the funds have become so big, they would be at the point where the law of diminishing returns would negatively impact their investment performances.

For example, when a fund grows to a certain size, its managers might feel that large investment positions are too cumbersome to liquidate without adversely impacting the values of the underlying securities. They might judge that the process of accumulating a new position that represents just a few percent of its assets would move the underlying security to an unreasonably high level. Or, they might feel that there just aren't sufficient new opportunities in its stated investment objective area to absorb new funds without disrupting the liquidity of the markets.

The move seems perfectly sensible, and one might easily think it would be in the best interest of a fund's existing shareholders. Logic would seem to dictate that funds closed to new investors would at least match, if not exceed, the returns of those still open to new holders.

However, that doesn't seem to be the case, according to our analysis.

In a study of funds for which it supplies ratings data, Ratings computed the average performance of 209 funds that had closed their doors to new investors prior to the beginning of 2007. We did the same for 4,349 equity and hybrid funds kept their welcome mats open to new investors during the year.

The open-door fund group of funds produced an average gain of 7.97% in the year just ended, 1.58 percentage points greater than the mean total return of 6.39% for the "closed" funds.

Of course, some of this could be due to managers closing off underperforming funds and letting the assets already in the funds just continue to sit. While many closed funds do perform extremely well, it seems that, overall, closed funds aren't as good a place to put money as the open-end funds.

An accompanying table summarizing the results shows comparisons for the investment objective categories with at least five funds closed to new investors. Five was chosen as a minimum threshold to try to ensure that the data would represent each group's results adequately.

In every classification except the largest -- domestic growth funds -- the average fund that remained open to new investors outscored the averaged closed-to-new-investors fund. In the popular and large category of non-U.S. equity funds, the 447 "open" offerings trounced the 32 "closed" funds by a significant 3.99 percentage points.

Another nearby table lists performance of the five best-performing funds in Ratings "A" grade range that remain open to new investors with, for comparison's sake, the comparable five that are closed to new holders. Obviously, the "minimum initial investment" data for the funds in the bottom list don't apply, since they currently are not accepting new investors.

Richard Widows is a financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.