When a Closed Fund Reopens, Enter Cautiously

Anyone who has ever picked apples or peaches knows that it always seems like the best-looking fruit is highest on the tree.

Likewise, some of the sweetest-performing mutual funds are out of reach--they stop accepting new investors, allowing managers to focus on running the money in hand instead of worrying about finding ways to deal with new cash. But when a closed fund decides to reopen, it’s like a sale on forbidden fruit and many investors rush in.

But just because a name-brand fund is reopening doesn’t make it a good buy.

So far this year, several big-hitting funds--PBHG Growth, Seligman Communications & Information, Acorn Fund and Skyline Special Equities, to name four--began taking new money. Proven winners such as those four--all in the top 8% of all funds over the last five years--reopen under the guise of “new opportunities in the market.” Sometimes that translates into “chances for the fund sponsor to rake in more money.”

“Some funds reopen . . . because there are millions of dollars that could be rushing in and they don’t want to miss the boat,” says Michael Hirsh, portfolio manager of Boston-based FundManager Trust, a family of funds that invests entirely in other funds. “But others have adapted and improved while they were closed and are now ready to take on more money and also maintain performance. You should buy a reopened fund for real reasons and not just on its reputation.”

Funds stop taking cash for many reasons. Some pursue an investment discipline that would be disrupted by too much cash, others don’t want to overburden analytical and support staff, and some can’t find those magical opportunities.

Fund closings and reopenings may seem like a new phenomenon, but they have been going on for years. Fidelity Magellan, the world’s largest fund, was closed for 15 years, from the mid-1960s to 1981. It reopened with about $107 million in assets; today it has about $50 billion and a huge family of admirers.

There are no statistics on how funds do after closing or upon reopening, but some anecdotal evidence suggests that investors be wary.

A good example is Seligman Communications & Information. The top-performing fund over the last decade, it drew mountains of cash when it announced plans to close last summer. The investors who beat the closing deadline have actually lost money, however, as the fund has lagged due to declines in the technology sector.

“The fact that a fund is reopening should not sway a decision,” says Robert Markman, who manages the Minneapolis-based Markman MultiFund Trust, another fund group that invests in other funds. “What matters is that it’s attractive based on its record--achieved when it was opened or closed--and that it fits in with your portfolio and investment objectives.”

Find out why a fund closed and whether the situation has changed. Ignore the “new opportunities” smoke screen. If a fund shuts its doors because it was afraid of getting too big--of having too much money and not enough researchers to ferret out good buys--find out if the research team has grown. Additional analytical power, for example, was one reason Janus Twenty reopened last year after more than two years in dry-dock.

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Shareholders in a reopening fund should also reevaluate it.

“To close a fund . . . means retarding revenue growth [to the fund sponsor] to protect current shareholders,” says G. Edward Noonan of Triad Mutual Fund Investors Corp. in Hingham, Mass. “If they needed to protect me when they shut down, I’d want to know why they feel it’s OK to stop now--how they can handle more money and still maintain performance--or I’d be nervous.”

If a reopening fund has maintained its track record and attractiveness and is a fit with your portfolio, consider it strongly. But even big-name funds aren’t always ripe; with more than 7,000 funds out there, you can usually find a clone and get another chance to pick from the top of the tree.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378. Russ Wiles’ column will return next week.

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Open and Shut

A closed open-end fund is not a closed-end fund.

Open-end mutual funds create shares on demand and value those shares on the value of securities held. Each day, such a fund will divide its total assets by shares to determine individual share values. However, managers can stop issuing new shares, thereby “closing” the fund. Investors can still sell their shares.

Closed-end funds function like stocks and generally trade on one of the major exchanges. The number of shares is limited. The price is determined by how the market feels about the fund’s holdings. The shares can trade at a premium or discount to underlying holdings.