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A History Of Mutual-Fund Doors Opening And Closing
As an aside, I talked Friday with Steve Romick, the lead manager of FPACX, about why the fund remains open. One of his arguments is that managing a closed fund is harder than you'd think. All funds are subject to regular redemptions. In an open fund that's drawing assets, those redemptions are met using the inflows. In a closed fund, managers may need to liquidate positions to cover them. That can goof with both the fund's portfolio positioning and its tax efficiency.
@David While it's true managing cash flows can be challenging, that is more so I think for funds that are currently or must always be fully invested. So I find it a little hard to believe FPA's rationale in this case as it is 37% in cash. That much cash should be able to easily handle redemptions without any forced sales of equities.
As an aside, I talked Friday with Steve Romick, the lead manager of FPACX, about why the fund remains open. One of his arguments is that managing a closed fund is harder than you'd think. All funds are subject to regular redemptions. In an open fund that's drawing assets, those redemptions are met using the inflows. In a closed fund, managers may need to liquidate positions to cover them. That can goof with both the fund's portfolio positioning and its tax efficiency.
The folks at Primecap Management seems to do just fine managing the portfolios of their stable of closed funds such as VPMCX, VPCCX, VHCOX, and POAGX with low turnover and cash levels below 5% (except VPCCX is a bit over 6%).
While not a stated critera, if we want to stay with moderated allocation funds, David Giroux at PRWCX also does pretty good managing his closed fund.
There are so many ways of closing a fund that it's hard to fathom cash flow management being a difficult issue.
There is of course the hard close, where even existing investors cannot add more money. This should not impede funds with excess cash, as Lewis pointed out. Then there are funds that allow money to trickle in by restricting the amount that existing investors can add. The Vanguard Primecap funds that Mona mentioned are a good example of these. They used to be restricted to $25K addditional per SSN per year. Vanguard has since relaxed that a bit, allowing $25K per account type per SSN per year. (Vanguard also allows Flagship clients to open new accounts.)
Most funds that are closed still allow existing investors to add money (soft close). Some go further. Many funds allow new accounts via retirement plans (usually if the plan already has some minimum amount in the fund when counting all participants). Or they may allow clients of investment advisers to open new accounts.
Some funds that are closed via third party intermediaries are still open to investors that invest directly. American Century Midcap Value (ACMVX) and Vanguard Wellington (VWELX/VWENX) are good examples of that. I've seen funds that close off access through major brokers (typically Fidelity and Schwab) but leave access open through other brokers. Sorry, no current examples come to mind.
The point is that cash inflow is more like a spigot than an on/off switch. It's fairly easy to turn that knob. The problem with inflows comes about not because there's no spigot, but if there's no pressure behind it. That is, a fund won't attract cash when the market is plummeting and no one wants to put money in, regardless of whether it's closed or not.
Comments
I'll share additional detail as soon as I'm able.
David
The folks at Primecap Management seems to do just fine managing the portfolios of their stable of closed funds such as VPMCX, VPCCX, VHCOX, and POAGX with low turnover and cash levels below 5% (except VPCCX is a bit over 6%).
While not a stated critera, if we want to stay with moderated allocation funds, David Giroux at PRWCX also does pretty good managing his closed fund.
Mona
There is of course the hard close, where even existing investors cannot add more money. This should not impede funds with excess cash, as Lewis pointed out. Then there are funds that allow money to trickle in by restricting the amount that existing investors can add. The Vanguard Primecap funds that Mona mentioned are a good example of these. They used to be restricted to $25K addditional per SSN per year. Vanguard has since relaxed that a bit, allowing $25K per account type per SSN per year. (Vanguard also allows Flagship clients to open new accounts.)
Most funds that are closed still allow existing investors to add money (soft close). Some go further. Many funds allow new accounts via retirement plans (usually if the plan already has some minimum amount in the fund when counting all participants). Or they may allow clients of investment advisers to open new accounts.
Some funds that are closed via third party intermediaries are still open to investors that invest directly. American Century Midcap Value (ACMVX) and Vanguard Wellington (VWELX/VWENX) are good examples of that. I've seen funds that close off access through major brokers (typically Fidelity and Schwab) but leave access open through other brokers. Sorry, no current examples come to mind.
The point is that cash inflow is more like a spigot than an on/off switch. It's fairly easy to turn that knob. The problem with inflows comes about not because there's no spigot, but if there's no pressure behind it. That is, a fund won't attract cash when the market is plummeting and no one wants to put money in, regardless of whether it's closed or not.