Two Top Funds Are Open Again

05/13/2010 1:00 pm EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

Russel Kinnel, editor of Morningstar FundInvestor, says a pair of formerly closed small-cap funds offer special appeal.

One of the few good things about the 2007-2009 bear market was that a number of fine stock funds that had been closed to new investors reopened. As the asset bases of these funds shrank—the result of falling share prices and shareholder withdrawals—managers concluded that they could safely accept new cash without hurting their ability to run the funds efficiently.

Despite the stock market's robust rebound over the past year, most of these reopened funds haven't been overwhelmed with new money. As a result, they're still open—but that may not be the case for long.

I've identified [two] standout funds that are open now but have closed in the past. Given the lack of cash infusion, they probably won't close soon. But because these funds boast strong long-term records, it wouldn't take much of a run up to persuade investors to send them money. Rather than waiting for the rush, buy the funds now, enjoy excellent performance before they close, then relax after they shut.

At Royce Special Equity (RYSEX), hot performance generally comes during down markets. Manager Charlie Dreifus's emphasis on firms with clean accounting and healthy balance sheets has helped make this small-company stock fund one of the best performers during bear markets.

In 2008, for example, it lost 19.6%, compared with a drop of 33.8% in the small-company Russell 2000 index. Because of Special's performance history, money tends to flow into the fund near the end of bear markets. The swell usually subsides during rallies, because the fund tends to lag in strong markets.

Dreifus last closed his fund in 2004, when assets totaled about $900 million. Today, the figure is $1.6 billion. But for Dreifus, the decision on whether to close depends more on the availability of attractive stocks than on the fund's size. (This fund closed Wednesday at $19.24.—Editor)

I'd kick myself if I missed a chance to buy Vanguard International Explorer (VINEX). The fund, which invests in fast-growing small and midsize foreign companies, has a significant advantage over its rivals: It charges only 0.45% a year, 0.5 percentage point less than its next-cheapest no-load-fund competitor.

A team from Schroder Investment Management, led by Matthew Dobbs, has produced strong long-term results with a patient approach, holding stocks about three years on average. The fund's asset level, currently $2.2 billion, is a little higher than it was when it last closed, in 2004. The asset base tripled that year, suggesting that it was the rate of inflows more than the overall asset level that led to the close. A $25,000 initial minimum requirement is Vanguard's way of preventing a repeat of the onslaught. (This fund closed Wednesday at $13.87.—Editor)

We recently added it to Morningstar's 401(k), so my money is where my mouth is.

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