Another pair of value funds is closing to new investors, perhaps pointing to a crest for the bargain-hunting style.
On Wednesday the no-load
Dreyfus Midcap Value fund closed to new investors and the broker-sold
announced plans to do the same with its
Small Cap Value fund on Jan. 31.
Since the tech sector and growth style's peak in March 2000, value funds in general and small- and mid-cap value funds in particular have seen solid gains and steady inflows. These are just the latest of several small- and mid-cap value funds to close, and a spate of closures often signals that a hot style poised to cool off.
Each fund's assets are north of $1 billion, several times the size of their average peer and reaching the levels where many small- and mid-cap funds close. Because small- and mid-cap stocks are usually less liquid than big-caps, funds that buy them often shutter before their assets hit $2 billion. The reason: A larger asset base can make it difficult for small- and mid-cap fund managers to build or unwind significant positions without moving stock prices and eroding returns.
Peter Higgins has run the $1.4 billion Dreyfus fund since its 1995 launch, with Brian Ferguson joining him as co-manager last March. The $1 billion Putnam fund has had Edward Shadek at the helm since its 1999 start, with Simon Sheldon joining him last September. Like most value investors, the managers of both funds focus on cheap stocks where they see a potential catalyst to boost earnings.
And their approaches have paid off five of the past six calendar years. Its 18.8% annualized gain over the past five years beats 96% of its peers and leads the
by more than 8 percentage points, according to Chicago research house Morningstar. The younger Putnam fund has topped its average peer in each of the past two calendar years. Its 23.6% gain over the past 12 months leads the S&P 500 by nearly 33 percentage points and beats 69% of its competitors.
Industry vets would say that the closures illustrate the right and wrong way to shutter a fund.
Back in March, Dreyfus determined that the fund should close to all but current shareholders and 401(k) plan investors at $1.4 billion, so its assets wouldn't cramp its style. Instead of choosing an asset level, Putnam has chosen a date to close the fund, an approach often criticized as a thinly veiled marketing ploy designed to spur interest by drumming up urgency.
After Jan. 31, Putnam will allow current and 401(k) investors to buy shares of the fund and even let in new shareholders as long as they participate in a systematic investment plan in which they invest a set amount each month.
No matter how you feel about the closings, you can't argue that they aren't part of a trend.
won Morningstar's coveted manager of the year award for 2001, but the mid-cap value fund where he made his name,
Oakmark Select, closed to new investors last May. He also runs the
Oakmark fund and the
CDC Nvest Select
fund, two value funds that are still open to new investors.
In the small-cap value pool, the
Wasatch Small Cap Value,
American Century Small Cap Value and
Turner Small Cap Value funds have recently closed to new investors.
With growth funds surging over the past 90 days, it's hard to forget that growth and tech funds' spate of closures in 2000 presaged the sector and style's fall from favor.