When a mutual fund says it doesn't want your money

By Stan Choe
AP Business Writer

NEW YORK (AP) — “No thanks.”

That’s what a growing number of mutual fund managers are telling investors who want to hand over their money, and it’s occurring just as many investors are getting comfortable with stocks again.
The market is at a record high, and more than 300 mutual funds have closed their doors to anyone who wants to put money in the fund for the first time. The funds run a wide range, specializing in everything from short-term U.S. bonds to dividend-paying Asian stocks. Of the 315 funds closed to new investors, 56 made the move during the first seven months of 2013, according to data from Morningstar. That compares with 49 for all of 2012 and 53 for all of 2011.

It’s actually an encouraging trend, at least for those already in the funds, says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. “Funds close to new investors for good reasons,” he says. “They want to make sure they protect existing shareholders.”

Mutual fund companies could earn bigger profits by keeping their doors open, because it means more assets on which managers can collect fees. But having too much money can make managing the fund more difficult. Stock pickers may run out of ideas they feel strongly about. Managers who specialize in small-cap stocks could also see their ownership stakes get too large in individual companies if they continue pumping money into their favorites. That could make selling them later more difficult.

“It’s nice to hear that the industry that has been criticized for being greedy is doing things that are taking the interest of shareholders to heart,” says Morty Schaja, chief executive officer of RiverPark Funds. His company’s RiverPark Short Term High Yield fund (RPHYX) closed to new investors in June.

“It’s like we’re in the business of selling cars, and all of a sudden, we don’t want to sell any more cars because there’s too much traffic,” Schaja says.

Much of the RiverPark Short Term High Yield fund is invested in a relatively small section of the market: bonds issued by companies with weak credit ratings that are scheduled to be repaid over the next month. When the fund launched in 2010, Schaja says the team thought it could comfortably handle $700 million to $1 billion. “After that, it’s harder to invest the money.”

The fund now has about $789 million, according to Morningstar, as demand ballooned for bonds with higher yields that are less sensitive to moves in interest rates.

Investors have been getting more comfortable with stock mutual funds recently as well. They put more money into stock funds than they took out for five straight months from January through May, according to the Investment Company Institute, which represents the fund industry. It’s the first time that has happened in more than two years, though investors pulled a modest amount out in June.
The increased flow of dollars and big gains for stocks this year have pushed assets for many stock mutual funds higher. Indexes that measure big, medium and small-sized stocks all set record highs in July.

The BBH Core Select (BBTEX) fund closed to new investors in November, before that run. It was for a simple reason, says Jeff Schoenfeld, a partner at Brown Brothers Harriman: Its managers are choosy and want to remain that way.

The fund has several criteria that companies must pass before the fund will invest, and it typically can identify only about 25 to 30 at a time. Companies must sell an essential product or service, have loyal customers and have a stock price that’s at least 25 percent below where the managers think it should be, for example. The fund owns big companies, such as Berkshire Hathaway, Comcast and Google.

“If you do the math, it leads you to the conclusion that after you reach about $20 billion, you would either own too much of any one company or you’d have to begin diversifying and own a larger number of companies,” Schoenfeld says.

To be sure, the decision to close the fund and protect existing shareholders wasn’t entirely selfless. “The investment team who work here are invested themselves,” Schoenfeld says.

Asked if the fund ideally would remain closed to new investors forever, Schoenfeld says he doesn’t know.

But mutual funds in the past have gone on to re-open, including Fidelity’s Contrafund (FCNTX), one of the most popular funds at $93.7 billion in assets. It welcomed back new accounts in December 2008 after having previously been closed since April 2006.

The fund’s manager, Will Danoff, said at the time that dollars from new investors could help him to scoop up stocks that had been knocked down by the financial crisis.