Here's one upside to a down market: a number of historically prominent mutual funds that long ago shut their doors to new investors are reopening. It's been years since anyone without an existing account could put money into some of the best-known names in the business, like Sequoia Fund, Dodge & Cox Stock, Longleaf Partners, Fidelity Magellan, Artisan Mid Cap Value, Oakmark Equityand Income, Vanguard International Explorer and Third Avenue Small-Cap Value.
That's because companies with shareholders' interests at heart typically close their funds before they get too big and unmanageable. Yet with the price of stocks plummeting and an onslaught of investors asking for their money back, many funds aren't nearly the size they once were so they're taking on fresh investors. A number of portfolio managers, especially the value-conscious sort, are also seeing cheap stocks all over the place and want extra money to buy in. One of the reasons Longleaf Partners reopened earlier this year was that its managers had identified some $1.5 billion worth of securities they wanted to buy. (Read a brief history of the 401(K).)
But even if a fund has a stellar long-term track record, do you really want to be hopping in at a time when recent performance has been dismal and other investors are headed for the door? "To get into some the best funds, you often have to do it when things aren't going great," says Russ Kinnel, director of fund research at the investment analysis shop Morningstar. "Virtually all of these funds have lost money since they reopened. You can't argue it's some magical low point."
The things to look for are, to some extent, the same as they always are low expenses and solid management. With reopened funds, it's especially important to make sure the people making the investment decisions are the same ones who created the great track record that made the fund so admired in the first place. The Sequoia Fund, for example, was long run by the legendary investor Bill Ruane, but he died in 2005.
It's also worth asking what sort of effect redemptions are having on the fund itself. Funds that buy and sell the stocks of large companies should have a fairly easy time getting out of positions, says Kinnel, but funds that focus on less-liquid sectors can wind up in a vicious cycle of having to sell holdings at fire-sale prices. There are a number of reopening high-yield bond funds; those might be worth staying away from for the moment. (Read about Hedge Funds: How the Smart Money Looked Dumb.)
Then there is the broader question of whether now is the best time to be putting money into mutual funds. Could all those investors heading for the hills more than $11 billion have left stock funds in November, on top of $57 billion in October and $47 billion September, according AMG Data Services actually know something? If history is any guide, the answer is no. "Investors are uncanny at how they're timing is exactly wrong whenever they make large net redemptions from mutual funds," says Marvin Bolt, president of the investment advisory firm Alpha Plus Advisors, who took a look at the trend in a November white paper. "If you have sustained outflows then it's a pretty good indicator that [the market] will be higher a year from now." Yet even that trusty indicator can't tell you the precise time to jump in.
Lou Stanasolovich, CEO of Legend Financial Advisors in Pittsburgh, is eying a few reopened funds for clients Artisan Mid Cap Value and Schneider Small Cap Value are long-time favorites but he's not looking to buy anytime soon. "Historically speaking, three months before the end of a recession, when things feel the worst, it's usually a good time to buy," says Stanasolovich. "I just don't think we're coming out of this recession anytime soon."
The risk with waiting around, though, is that a fund that closed once before in order to protect current shareholders is likely to do it again. One idea that Stanasolovich floats is investing the minimum amount required often $2,000 in order to lock in as a shareholder; existing investors normally can keep putting in more money even after a fund is closed.
If you do decide to buy a fund, just make sure you do so after any capital gains are distributed for the year. There's no need to field that tax bill since you can avoid it by buying shares after gains are paid usually by the middle of December.