A Primer on Closed Funds

07/14/2006 12:00 am EST


Janet Brown

President, FundX Investment Group

Janet Brown is editor of NoLoad FundX—the top performing fund newsletter advisor for the past 20 years. Her upgrading strategy is based on a logical system of investing with top fund managers while they are performing well, and moving to others when the original choices are no longer the best. Here, she offers the scoop on fund closings.


Our primary goal at the Money Show Digest is to whittle down the voluminous investment information with which investors are deluged into educational, as well as actionable data. We peruse the latest newsletters, Web sites, and investment recommendations to help you become acquainted with the best minds on Wall Street, and outline their strategies, philosophies, and recommendations in these pages.


And sometimes, we run across an enlightening article that answers questions commonly asked by our subscribers. With that in mind, I found Janet Brown’s discourse on the ins and outs of closed funds might be of great value to you…


“Mutual fund closures can worry or confuse investors. Some wonder if a closure indicates unseen problems at the fund; others take it personally when a fund won’t accept their money.


“But a fund’s closing is a simple, routine practice and shouldn’t cause concern. When a fund closes, it is simply limiting (or, in more rare cases, stopping) the flow of money coming into the fund.


“A fund usually closes when it has grown too large to successfully continue following its particular investment approach. A fund that seeks to invest in undervalued, small-cap companies, for example, has a limited number of possible investments: Both a certain valuation and a certain capitalization are required. At some point, the fund manager may not be able to find enough appropriate investments. If a fund finds it hard to put additional shareholder money to work, it may close.


“Most fund closures are temporary. Closed funds usually reopen as the inflows and outflows stabilize or as market conditions change and bring new opportunities. But there is no predetermined time frame for a fund to close and reopen. Some funds reopen within a year; other funds remain closed for many years.


Janet goes on to describe the different types of fund closures:


“A ' soft close' closes the fund to new investors although existing shareholders can continue to invest. A ' hard close' closes the fund to both new and existing investors. A ' direct close' closes brokerage availability and only direct purchases are permitted.


“In NoLoad FundX , if a fund is highly ranked when it closes, we’ll continue to cover it until it falls into our Suggested Upgrades area or until we believe few, if any, Upgraders are still tracking the fund.”

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