Sometimes, Closing a Fund Is More Hype Than Help

Mutual funds are announcing at a brisk clip that they’re locking up and not letting anyone else in.

The decision to close a fund is usually made because the fund has grown too large, or because stocks are too pricey to make new investments. Indeed, fund managers are praised when they shut funds, because it tends to be an investor-friendly decision that doesn’t immediately help their own bottom line.

But sometimes shutting a fund’s door is a come-on.

“Closing a fund has become almost a theatrical event instead of an investment event,” says Don Phillips, president of fund tracker Morningstar Inc. in Chicago.

Perverse as it sounds, some funds are shut because management has found a better way to lure more, not fewer, investors. And sometimes fund managers milk the occasion as a promotional opportunity--a reasonable suspicion in those cases in which the announcement comes weeks or months ahead of the actual closing.

Take, for example, Scudder Investor Services, which said at the start of the year that it would shut some hot properties-- Scudder Classic Growth Fund and Scudder Value Fund--in early spring.

“Here’s another April 15 deadline you can’t afford to miss,” Scudder said in ads that ran in the Wall Street Journal, Smart Money and Money magazines in January and February. In a separate direct-mail piece with a two-page letter promoting the same two funds, Mark S. Casady, president of Scudder Investor Services, wrote, “I urge you--don’t delay, or you could accidentally lock yourself out of this opportunity.”

In Scudder’s case, the funds weren’t really being closed; what was being ended was investors’ ability to buy them without a sales charge. The funds, formerly no-load, were being converted to products with a sales fee, to be sold exclusively through Kemper Funds.

“Because the new Kemper funds were in registration with the Securities and Exchange Commission, we were precluded from discussing” in the ads that they would still be available, a spokesman says. “I acknowledge that this is marketing,” he adds, but he stresses that “the underlying purpose” of the ads and the direct mail was to be sure prospective and existing investors knew about the company’s plans to shut the no-load version of the funds.

Some funds clearly want to stop the inflow of money and let their portfolio managers get a grip on things in an ebullient market.

Janus Funds said that Janus Overseas would close at the start of business Monday, April 20, springing the news on investors at 5 p.m. Eastern time on Friday, April 17. The handling of that closing left investors little room for ambiguity about what Janus was trying to accomplish: The fund didn’t want any new investors.

A similarly airtight closing was achieved by the Vanguard Group when it said April 21 that it would be closing the Vanguard/Primecap Fund on--imagine this--April 21. “No new account applications or exchange requests to purchase shares will be accepted by the fund following the close of business today,” the company said.

As a matter of policy, Vanguard closes funds the same day it announces the closing, a spokesman says.

Those examples are in sharp contrast to the two Scudder funds, and the handling of a closing by Putnam Investments, which said in mid-May that it would close its Putnam Capital Appreciation Fund six weeks later.

A Putnam spokesman said the time gap was set up that way “because it gives time for investors and financial advisors to make arrangements.” When asked what those “arrangements” might be, the spokesman restated his comment. Asked further if the “arrangements” could be anything other than letting investors purchase more Capital Appreciation shares, he said, “If that’s what you’re trying to get me to say, I won’t say it.”

Barry Barbash, director of the investment management division of the Securities and Exchange Commission, says securities law doesn’t have a lot to say about the way funds time their closings.

“It could come back to haunt a fund” if the impression were left that there was some benefit to getting in before it closed,” Barbash says. But for the most part, “there is no legal requirement as to how to close a fund,” he says. “It’s a fund decision.”

And fund companies have been known to effectively use the closings of funds in their groups, Barbash says. “The idea of creating a notion of scarcity is a marketing pitch the industry uses from time to time,” he says.

Richard Phillips, a Washington lawyer who advises mutual funds, says some funds use an individual closing as a way to advertise the rest of the funds under their management. “They use it to communicate, ‘We’re a hot fund complex,’ ” he says.

Dan Weiner, editor of the Independent Adviser for Vanguard Investors, say he’s been watching funds market themselves early on by saying they’ll shut when assets reach a certain level.

“More and more, they’re setting an upper limit very early,” he says. So investors are aware from the start that there could be a deadline ahead.

Numeric Investors said from the start that it would close N/I Growth Fund and N/I Microcap Fund when assets of each reached $100 million, and those funds are now closed to new investors. Scudder Micro Cap Fund said in its prospectus in August 1996 that it would close if and when assets reached $100 million. When that happened in late September 1997, the fund was promptly closed to new investors.

That method “creates a line into the door,” adds Phillips of Morningstar. “People say, ‘If I want in, I have to act sooner rather than later.’ It’s a great marketing tool, and you can get the dollars before you have the track record.”

Jim Lowell, editor of Fidelity Investor, said funds that are serious about shutting think of all the loopholes, ruling out such “getting in anyway” tricks as allowing an investor to give shares to a buddy who wants to get in after a fund has closed. Fidelity has begun to forbid that in its closed funds, “which is a way of saying, ‘When we close a fund, it’s closed,’ ” he says. “It’s a much cleaner approach.”

Indeed, discouraging tricks isn’t a bad idea for customers in any event, adds Lowell, who says there’s every reason to be cautious when a closing is in order.

“As an investor, you certainly wouldn’t want to be rushing into a fund that’s closing,” he says. “It’s not a bullish indicator.”

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Susan Antilla writes for Bloomberg News. She can be reached by e-mail at santilla@bny15.bloomberg.com.