In a bid to take advantage of the stock market's volatility, mutual fund companies are reopening closed funds at a record pace.
In a bid to take advantage of the stock market's volatility, mutual fund companies are reopening closed funds at a record pace.
Last year, 120 fund share classes reopened to investors, the highest annual level since Morningstar Inc. of Chicago began tracking the data.
And there is no sign of a slowdown. Last month, 22 fund share classes reopened — setting a pace unrivaled since April 2006, when 28 share classes reopened, according to Morningstar.
"Markets are semi-chaotic, and that may lead to unusual investment opportunities we want to be ready for," said Jean-Marie Eveillard, the well-known manager of the $9.94 billion First Eagle Overseas Fund and the $21.52 billion First Eagle Global Fund.
Both funds reopened to in-vestors on Jan. 14 and are advised by Arnhold and S. Bleichroeder Advisers LLC of New York.
"Falling markets beget opportunity," said Amit Wadhwaney, portfolio manager of the Third Avenue International Value Fund, which reopened on Dec. 20. The $1.97 billion fund is advised by Third Avenue Management LLC of New York.
Other funds that have reopened recently include the $391 million AIM European Small Company Fund from AIM Investments of Houston, a subsidiary of Invesco PLC of London. The fund reopened to new investors on Friday.
Of course, the fund reopening that has grabbed most of the headlines this year was that of the $44.82 billion Magellan Fund, which Fidelity Investments of Boston reopened Jan. 15.
Other companies that have reopened funds recently include Royce & Associates LLC of New York and Southeastern Asset Management Inc. of Memphis, Tenn.
Most of the reopenings have involved value, small-cap and international funds.
That isn't surprising, given that value and small-cap stocks lagged behind growth and large-cap stocks during much of the past five or six years, said Reuben Gregg Brewer, director of research at Value Line Inc. of New York.
International funds are reopening to take advantage of what is still perceived to be a "hot" market for them, he said.
Considering the quality of some of the funds that have reopened, the trend presents some good opportunities for investors, said Bridget B. Hughes, a senior analyst with Morningstar.
But investors will need to act fast, she said.
"I think generally you need to almost immediately decide whether this is something to take advantage of," Ms. Hughes said.
Case in point: The AIM European Small Company Fund "may be closed again once fund assets under management near $500 million," AIM said in a statement.
Given the firm's reluctance to reopen the fund in the first place, Southeastern Asset Management's Longleaf Partners Fund is also likely to close again soon.
In November, Southeastern opened the fund to new investments from existing shareholders, hoping that they would provide it with enough new cash to take advantage of buying opportunities. Having failed at that, it opened its doors to shareholders in other Longleaf funds a month later.
Finally, last month it opened its doors to all investors.
"I would not wait [to invest in the fund] forever, given how popular the manager is," said Gregg Wolper, another Morningstar analyst.
Although many of the funds that have reopened have stellar reputations, financial advisers generally warn clients not to rush into them.
"It's a business," said Andrew Tapparo, president of Tapparo Capital Management, a Topsfield, Mass.-based firm that oversees about $25 million in assets.
"Fund managers need to make money for their operations," he said. "You hope the reason they reopen isn't as self-gratuitous as just that, but it's a possibility."
Even if the fund companies' motives are pure, investors should carefully consider the pros and cons of investing in a reopened fund — just as they would any other fund, said Nicholas Spagnoletti, a partner at Macro Consulting Group LLC. The Parsippany, N.J.-based firm oversees about $350 million in assets.
"Investors need to ask themselves, 'Would I buy this fund today?'" he said.
If investors were to take a hard look at Magellan, for instance, they might decide to take a pass, said Jeff Tjornehoj, a Denver-based senior analyst with Lipper Inc. of New York.
"Fidelity Magellan is a larger, much older fund, and as such it has generally accumulated longtime investors," he said.
As a result it has a "demographic problem," Mr. Tjornehoj said.
"In order to maintain a profitable product, they need to capture newer investors to keep things rolling," he said.
The First Eagle funds should also be approached with caution, Ms. Hughes said.
At first glance, buying into the funds is "a no-brainer" as Mr. Eveillard is an experienced, well-thought-of manager who has proven his mettle, she said.
But he originally retired in 2004 and is back managing the funds only because Charles de Vaulx, with whom he once co-managed the funds, has left, Ms. Hughes said.
Mr. Eveillard isn't expected to remain at the funds much longer, and little is known about his presumed replacement, associate manager Abhay Deshpande, Ms. Hughes said.
Mr. Eveillard, however, said he is completely confident in Mr. Deshpande's abilities.
The First Eagle situation is an example of the dilemma investors will face as more funds reopen — something industry experts said is a certainty, given the volatile nature of today's markets.
"If this stock market volatility holds up in the months ahead, and the markets do retreat a bit, it will be ... a good market in which to find investment opportunities," said Robert Q. Wyckoff Jr., a managing director with Tweedy Browne Co. LLC of New York, and co-manager of the $7.62 billion Tweedy Brown Global Value Fund, which reopened to new investments Jan. 2.
David Hoffman can be reached at dhoffman@crain.com.
