Why do mutual funds close to new investors (and 3 funds that have reopened)?

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Image credit: MobilFunk7The Wall Street Journal reported this weekend that three mutual funds previously closed to new investors are reopening to accept new money. I’ll share the three funds with you, but first I thought this would be a good opportunity to talk about why mutual funds would ever close to new investors.

The primary reason a fund closes to new investors is so the fund manager can continue to invest in the style he or she has chosen. For example, the manager may wish to keep relatively small positions in each stock owned, which becomes harder to do as more cash rolls in. Or the manager may believe that he or she doesn’t have a good place to invest more cash. Warren Buffett has this problem given the billions of dollars Berkshire has in its vault. He’s said he’ll return cash to investors in the form of a dividend if his return on capital diminishes past a certain point. We’ll see.

So does closing a fund help or hurt it’s performance? In a study by Morningstar, it found that most funds underperformed after closing, although it attributed this to the up and down cycle of a hot mutual fund. The study did find, however, that taxes for existing investors went up after a fund closed. Why? Because there was no longer an influx of new investors to share the tax burden. In fact, Vanguard has said that the tax consequences of closing a fund usually outweigh any advantages.

So which funds are reopening? Here they are, and keep in mind that one fund is only opening to those who already invest in the fund family, although the fund may open to all investors.

Third Avenue International Value

  • Ticker: TAVIX
  • Style: Foreign small/mid value
  • Morningstar Rating: 3 stars
  • Expense Ratio: 1.45
  • Reopening: December 20, 2007

FPA Crescent

  • Ticker: FPACX
  • Style: mid-cap value with large foreign exposure and holding lots of cash
  • Morningstar Rating: 5 stars
  • Expense Ratio: 1.25
  • Initial Investment: $1,500 ($100 if opening an IRA)


Longleaf Partners

  • Ticker: LLPFX
  • Style: Large blend
  • Morningstar Rating: 4 stars
  • Expense Ratio: 0.90
  • Reopening: Partial reopening to investors in other Longleaf funds, but may fully reopen to new investors.

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Published or Updated: April 3, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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