Mutual funds reopen their doors to new investors

The famed bronze bull is a landmark in New York’s financial district. Many fund managers shut out new investors as stocks trade near record levels, as they are now, but some are seeking new money to invest.

The velvet rope is dropping in front of more mutual funds.

Some smaller corners of the market have stalled recently, even as the Standard & Poor’s 500 index closes in on its record high. That means some fund managers are once again welcoming new investors, after they had closed their funds years ago to new money.

More than a dozen mutual funds have reopened their doors over the last year, according to data compiled by Morningstar. The number doesn’t include funds that have partially reopened — those that still bar new entrants but allow longtime investors to add more money.

Funds reopen to investors when they’re looking for new cash to invest. That usually comes after assets have shrunk because their corner of the market has broadly struggled or because the fund’s managers have made poor investment choices. In 2008, when the financial crisis sent global markets plunging, at least 46 mutual funds reopened to new investors.

The funds that have reopened over the last year cover a grab bag of categories, including natural resources and dividend-paying stocks. But more than a quarter of them focus on small-cap stocks, which hit a wall last year. Small-caps had their worst performance in 16 years relative to large-cap stocks.

“You look at the market as a cycle, and there tend to be times to sow and times to reap,” says Buzz Zaino. He’s the lead portfolio manager of the Royce Opportunity fund, which has closed twice since 2003. It has also reopened twice, when the market was down and cheap stocks were easier to find.

Analysts generally see it as a sign of good stewardship if a fund closes before growing too large. A bigger pile of assets can mean more fees for fund managers, but it also forces them to use it. Stock pickers can run out of ideas they feel strongly about if they have too much cash. Another danger for small-cap stock funds in particular is that a fund could build up too big a stake in a single stock, which makes selling later more difficult.

So, does it pay to invest in a newly reopened fund? One consideration is that it’s typically a contrarian investment. Funds usually reopen only after struggling, whether that’s due to the market they focus on or their own missteps.

Another consideration is that a newly reopened fund could close if it gets hot and assets run up again.