Small Caps Beckon, Then Close

But despite a lock on the front door, you can often find another opening

Small-company funds have popped to the top of the growth charts, but many investors scrambling to buy them find the door closed.

A number of top small-cap funds have stopped accepting new investors, not because they want to be exclusive but because they want to keep the performance up.

Small-cap funds invest in small companies, those whose market value (capitalization) - the stock price times the number of outstanding shares - generally falls under $500 million.

And there just aren't that many of them. According to one analyst, in fact, the total value of all small-cap companies is less than that of just one of the major blue-chip companies.

If a small-cap fund gets too much money, its manager can't put all the cash to work on the best companies' stocks, and performance falters.

So the fund closes the doors to new investors.

But that doesn't mean you can't find another door.

When it comes to getting into the mutual fund of your choice, never say, "Never."

Case-in-point: The Oakmark Small Cap Fund (800-625-6275), a red-hot value fund, slammed its doors to new shareholders this summer, a disappointment since the fund is up 40 percent through Oct. 17.

But there is a back door, says a fund representative. Shareholders in other Oakmark funds can always put new money into the fund.

But non-shareholders can get in too. You can invest at least the minimum $1,000 in one of Oakmark's five other mutual funds, also value funds, or one of Oakmark's three money- market funds.

Then wait 15 days, which is mandatory with the Oakmark fund family. At that point, you're no longer a new investor, and you can transfer your money over to the Oakmark Small Cap Fund.

'Most people go through the money-market accounts to buy into the small-cap fund," says an Oakmark spokeswoman.

"Closed doesn't always mean 'closed,'" says Paul Ellenbogen, who tracks small-cap funds for information firm Morningstar Inc., Chicago. "Sometimes a [fund family] really will close off a fund. But in fact, you usually can get into that fund, or into a fund that is very similar."

Often if you have "even one share in a fund [family], you can get into a fund when it closes," says Eric Kobren, who publishes FundsNet Insight, a monthly commentary on mutual funds.

Closing funds to new shareholders has become increasingly popular among fund families, experts say.

In the large-cap arena, the mighty Magellan Fund, for example, recently bolted its doors to outsiders. But existing shareholders can continue to buy in, as can shareholders in other Fidelity funds, including participants in Fidelity retirement plans.

But the issue of closing is most pronounced with small-cap funds, where fund managers like to keep asset sizes manageable. Since most small-cap stocks tend to cost less than shares in large-cap companies, it becomes harder for fund managers to stay fully invested when monies are pouring into fund coffers. Moreover, there are fewer top-ranked small-cap companies to invest in than large-cap companies.

Of the total of 334 small-cap funds tracked by Morningstar, some 25 are now closed to new investors. They include such funds as AIM Aggressive Growth, Babson Enterprise, Franklin Microcap Value, and Heartland Value.

Closing a fund, especially a small-cap fund, "can make a lot of sense," says Mr. Ellenbogen. "It may not be good for non-shareholders, but if a fund family really cares about its shareholders, it will do it."

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.




Save for later


Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items


Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items


Failed to save

You have already saved this item.

View Saved Items