Reopened Putnam Fund to Close Again

In investing, new opportunities can come and go in a matter of days.

Ten, in one case.

The $34-billion Putnam New Opportunities fund is closing to new investors at the end of business Friday, just 10 days after the company reopened the 10-year-old fund to new investors.

“I can’t remember a fund reopening and then closing again this fast,” said Russel Kinnel, equity editor for Chicago-based fund tracking service Morningstar Inc.

When New Opportunities reopened, Putnam officials said the fund would be closed again once it attracted an additional $1 billion in net new investments. Remarkably, the fund is on track to get that additional $1 billion by Friday.

New Opportunities, one of the nation’s largest stock funds, surged 70% last year, ranking 29th among 309 large growth stock funds.

Before the fund’s Jan. 18 reopening, it had been closed to new investors since June 1997--with the exception of 401(k) investors and others who agreed to make systematic investments every month. New investors will still be able to get into the fund through these two routes.

The New Opportunities closure comes less than two weeks after the $8-billion Janus Global Technology fund was closed to new investors. Morningstar’s Kinnel thinks this could be the start of a trend.

Among other popular funds he thinks could be shuttered this year: the $4.4-billion Janus Enterprise and the $3.6-billion RS Emerging Growth.

Does this mean you should jump into those funds now?

Not necessarily.

Morningstar recently studied the performance of funds that closed between January 1980 and June 1996. On average, funds that closed in that period generated 19.6% a year in total returns in the three years leading up to the closure. But in the three years afterward, the funds gained just 15.4% a year, on average.

The slowdown makes sense, Kinnel says. A big reason funds close is that they are attracting too much money too quickly. That tends to happen after funds post huge gains for several years. The upshot: After money pours in, hot funds’ returns tend to slow as managers struggle to invest the cash.

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Closed Funds: Before and After

Conventional wisdom says investors should try to jump into a mutual fund just before it’s about to close to new investors. But Morningstar Inc. studied about 40 funds that closed to new investors between January 1980 and June 1996 and found that fund performance often slows after a closure. One possible reason is that funds tend to close after they’ve attracted huge sums of cash--which then become a challenge for the manager to invest.

Average annualized returns:

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Three years before closing: 19.6%

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Three years after closing: 15.4% *

Source: Morningstar Inc.