Vanguard Closes Junk Bond Fund to New Investors

Mutual fund giant Vanguard Group took the rare step Thursday of turning away new investors from its junk bond fund, reflecting the big influx of cash being pumped into these hot-performing portfolios.

The “cooling off” period for the $9.2-billion Vanguard High-Yield Corporate Fund is expected to last at least three months, Vanguard said. It comes at a time when some money managers are cautioning that junk bonds are overvalued after a big run-up this year.

Junk bonds, also known as high-yield corporate debt, are rated below investment grade and carry high yields to offset risk. Investors have flocked to junk bonds as default rates have decreased and yields on safer investments have fallen.

Most of the fund’s investors are aware of the risks associated with junk bonds, but a flood of new money from short-term investors who are not willing to take on those risks could hurt the portfolio, Vanguard Chairman John Brennan said in a statement.

Besides no longer accepting new accounts, Vanguard also said it would restrict the fund’s existing shareholders to $100,000 in additional purchases per year.

“Their decision is more than likely a symptom of this gold rush” into junk bonds, said Eric Jacobson, an analyst at research firm Morningstar Inc. “People are chasing returns, chasing high yields, barreling into this area of the market.”

Just last week, investors deposited a net $1.45 billion into U.S. junk bond mutual funds, the biggest inflow since February and the third-largest weekly inflow on record, according to data tracker AMG Data Services.

Vanguard’s move also represents the first time the Valley Forge, Pa.-based company has blocked new investors from a bond fund.

Mutual fund companies often close stock portfolios out of concern that assets are growing too unwieldy. Vanguard most recently closed its Precious Metals Fund to new investors. That fund, which closed in June 2002, has not reopened.

Vanguard’s High-Yield fund, overseen by money managers at Wellington Management Co., is up about 10% this year and has pulled in net new cash of $1.4 billion during the first five months of the year. That’s about double the amount that was invested in the fund during the five previous months.

The fund’s performance, though, has trailed many of its rivals’ this year. The average high-yield fund has risen 12.8% year to date through June 5, according to fund research firm Lipper Inc.