Shareholders have been exiting mutual funds at a record pace lately, withdrawing $126 billion in October alone, according to the Investment Company Institute, the mutual fund trade group. While the cash has been fleeing, fund companies have been busy with their own stampede, rushing to reopen funds that were formerly closed to new investors. Prominent funds that have reopened recently include Dodge & Cox Stock (DODGX), Fidelity Contrafund (FCNTX), Longleaf Partners (LLPFX) and Sequoia (SEQUX). For the first 10 months of 2008, 67 funds reopened — about double the figure for 2007, according to Morningstar.
Frustrated investors should be encouraged by the flurry of fund activity. In the past, reopenings have often signaled market bottoms. Consider the experience of T. Rowe Price, which tends to reopen funds during bleak moments. In 1974, the company reopened T. Rowe Price New Horizons (PRNHX), a small cap fund. During that year, small stocks lost 20.0 percent, according to Ibbotson Associates. Then, in 1975, small stocks leaped 52.8 percent and began a nine-year rally.
After closing during the bull market of the 1990s, New Horizons reopened in 2002, a year when the S&P 500 lost 22.2 percent. In 2003, New Horizons gained 49.3 percent and began a three-year streak of double-digit returns. The T. Rowe Price winning tendency is not confined to domestic funds. After suffering three consecutive losing years, T. Rowe Price International Discovery (PRIDX) reopened in 2003 and began a five-year streak of double-digit returns. What has T. Rowe Price done lately? The company has reopened T. Rowe Price Small Value (PRSVX) and T. Rowe Price High-Yield (PRHYX).
An Auspicious Trend
It is no accident that fund reopenings often signal market bottoms. Portfolio managers typically close funds when they are overwhelmed with cash and stocks seem too rich to buy. Funds reopen when investors have pulled back and managers are itchy to invest in bargains.
The current round of reopenings could be particularly promising because many star managers have been publicly urging investors to buy. In a press release announcing his fund's reopening, Joel Tillinghast, portfolio manager of top-ranked Fidelity Low-Priced Stock (FLPSX) fund, said he is “seeing more and better buying opportunities.” When he reopened his fund, John Calamos Sr., veteran manager of Calamos Convertible (CCVIX), said “High-quality issues appear undervalued … ”
Advisors seeking to take advantage of reopened funds have plenty of intriguing choices. Besides boasting strong performance records, many of the funds have earned top grades from Morningstar for protecting the interests of shareholders. “When companies close funds, they are trying to keep the portfolios from becoming too big to manage,” says Jim Holtzman, a financial advisor with Legend Financial Advisors in Pittsburgh.
Many of the best reopened funds specialize in small stocks. Managers are quick to pull the trigger because it is hard to put large amounts of money to work in small caps. With small stocks soaring in 2003, funds began closing. Among the first to shut their doors were microcap specialists, who focus on stocks with market capitalizations of under $500 million. Now investors who were barred from microcap funds can resume shopping. A top choice is Royce Micro-Cap (RYOTX), which returned 9.8 percent annually during the past decade, outdoing 90 percent of small blend funds and topping the S&P 500 by 9.4 percentage points, according to Morningstar. A diehard value investor, Portfolio Manager Whitney George favors stocks selling at below-average prices. But he is not looking for junk. Companies in the Royce portfolio have strong balance sheets and high returns on equity.
Finding bargains is easy these days, says George: “We are seeing many stocks trading at four or five times earnings …Two years ago the multiples were three times as high.”
Another small cap standout is Evergreen Special Value (ESPAX). Like Royce, Evergreen favors solid companies with healthy balance sheets. A favorite holding is Mueller Industries, which makes pipes and valves. “They are a low-cost producer and generate a lot of cash,” says portfolio manager Jim Tringas.
Investors seeking to diversify portfolios may consider Calamos Convertible, which returned 5.4 percent annually during the past decade, outdoing 94 percent of its competitors. Convertibles are fixed income securities that can be converted to stocks. Because they are cushioned by bond-like yields, convertibles tend to outdo stocks during downturns. But during the first 10 months of 2008, convertibles sank about as much as the S&P 500. Throughout the downturn, Calamos outpaced most competitors and beat the S&P by 5 percentage points. Portfolio manager John Calamos Sr. avoided the worst damage by sticking with solid securities.
Advisors who want to shop in battered Asian markets can try Matthews Pacific Tiger (MAPTX), which returned 13.2 percent annually during the past decade, outdoing 93 percent of competitors. The fund aims to buy young growing companies and hold them for years. Matthews tends to steer away from exporters and buy companies that will benefit from the growing domestic economies of Asian emerging markets. Big holdings in health care stocks helped the fund outdo competitors this year.
For a broad selection of international stocks, a strong choice is MFS International New Discovery (MIDAX). The fund favors growing stocks selling at moderate prices. “We want reliable companies that can grow for at least three to five years,” says portfolio manager Camille Humphries. Sticking with solid businesses, MFS has lost less than most of competitors during the downturn. And when the rebound finally arrives, this steady fund should rank among the leaders.
Top funds that recently reopened. A bullish signal for the broader market?
|Fund||Ticker||Category||3-yr. Return||5-yr. Return||% Category Rank. 5-yr. Return||Max Front-End Load|
|Calamos Convertible A||CCVIX||convertible||-4.1%||0.0%||8%||4.75%|
|Evergreen Special Value A||ESPAX||small value||-5.5||2.9||34||5.75|
|Matthews Pacific Tiger||MAPTX||Pacific/Asia ex-Japan||-0.5||6.7||43||0|
|MFS International |
New Discovery A
|Royce Micro-Cap||RYOTX||small blend||-4.2||2.6||27||0|
|Source: Morningstar. Returns through 10/31/08.|