During the bull market that had begun in 2003, dozens of funds closed, refusing to accept new shareholders. Fund managers took the step to avoid being overwhelmed by cash inflows. These days, the flood of money has dried up, and funds that had been closed are now reopening. So far this year, 72 funds have reopened, almost double the figure for 2007, according to Morningstar. The flurry of openings could be a positive omen. Time and again, upticks in fund openings have signaled market bottoms, and fund closings have occurred near market peaks. But many investors ignore the indicators, buying and selling at the wrong times. Today, shareholders are withdrawing record amounts of cash from funds. Instead, long-term investors should consider buying shares of newly reopened funds. Funds often close after periods of hot performance. With investors racing to buy shares, fund managers worry that their portfolios will become bloated. If that happens, funds can no longer trade nimbly, and performance records can lag. When companies announce closings in advance, many investors scramble to buy before the deadline. But most often, shareholders have been disappointed with their last-minute purchases. According to a study by Morningstar, funds tend to slip after they close to new investors. The researchers looked at returns for three years before and after closings. On average, the funds that closed had outdone more than 80% of their competitors during the previous three years. But after shutting the doors, the once-hot funds slipped into the middle ranks. This could occur because investors tend to jump aboard funds that are peaking and about to enter periods of being out of favor.
While closed funds can stagnate, newly reopened funds often surge. Consider the experience of T. Rowe Price, which has a long record of reopening funds at market bottoms. The company reopened T. Rowe Price New Horizons ( PRNHX), a small-cap growth fund, in 1974. During that year, small stocks lost 20%, according to Ibbotson Associates. Then in 1975, small stocks returned 52.8% and began one of their greatest rallies ever, producing double-digit returns for nine years in a row. After losing 15% during the 12 months ending in March 2003, T. Rowe Price International Discovery ( PRIDX) reopened. During the next year, the fund returned 80.6% and went on to record four years of double-digit results. Make no mistake, funds do not always skyrocket after a reopening. But the current round of openings presents some unusual opportunities. Many of the reopened funds had been closed for years. Now investors have a chance to grab funds with stellar long-term records. At the top of the list is Sequoia ( SEQUX), which had been closed for 25 years. During the 15 years ending in October, the fund returned 10.5% annually, outdoing 98% of its large-blend competitors and topping the S&P 500 by 3.5 percentage points. Another strong choice is Dodge & Cox Stock ( DODGX), which returned 9.6% during the past 15 years, besting 99% of large-value rivals. Other long-term winners that recently reopened include Longleaf Partners ( LLPFX), Matthews Asian Growth & Income ( MACSX), and William Blair International Growth ( WBIGX). Small-cap funds present some of the most noteworthy choices. Because small stocks can be difficult to trade, some top fund managers close their portfolios when assets get much above $300 million. As a result, many of the best small-cap funds are closed for long periods. If you have been holding mediocre small-cap performers, now is a chance to swap them for some of the best in the business. A compelling selection is Wasatch Small Cap Value ( WMCVX), which returned 10.2% during the past decade, outdoing 92% of its small-blend competitors and topping the Russell 2000 small-cap index by 5.3 percentage points. Investors seeking a micro-cap specialist should try Royce Micro-Cap ( RYOTX), which returned 9.8% during the past 10 years. For foreign small stocks, consider Oakmark International Small Cap ( OAKEX), which returned 11.1%, outdoing 98% of foreign small mid-value competitors. By buying such star performers at a bleak time, investors stand a good chance of achieving solid returns.