When a small-stock fund closes its door to new investors, its doing current shareholders a favor.
Too much money to invest in a small-capitalization fund - say, $1 billion or more - can make the fund unwieldy, which can hurt performance. It's hard to buy or sell big positions in small stocks without the price moving against you.But a fund-closing done wrong takes on the flavor of a going-out-of-business sale, however unintentional. That can lead to a torrent of new money, which can be difficult to invest profitably.
Exhibit A is Heartland Value, whose returns put it in the top 10 percent of aggressive-growth funds for the past three and five years.
When assets swelled from less than $50 million at the end of 1992 to more than $300 million late last year, managers William Nasgovitz and Hugh Denison decided to close soon.
"We tried to plan it in an orderly fashion," Nasgovitz says. But on May 25, the fund sent a letter to investors with the headline, "Value Fund closing no later than July 1!"
The letter added, "Don't worry, its not too late to become a shareholder!"
By the time the fund closed June 30, assets surpassed $885 million. Will the fund be able to handle such a large amount of money?
While performance has been top-notch again this year, Nasgovitz and Denison have their work cut out for them. They have started another fund, Heartland Small Cap Contrarian, which they expect to hold one-quarter to one-third of the same stocks as Heartland Value.
A new fund with many of the same stocks will only compound trading difficulties for Heartland Value.
Heartland Value is far from unique. Small-cap Janus Venture did much the same thing in 1991.
Janus sent a letter to investors alerting them to the impending closing and put a recorded message on Janus' 800 number.
Assets topped $1.1 billion by the time the fund closed, and Venture badly trailed its peers the next two years. Janus officials now say they erred by giving investors too much time to open accounts before closing Venture.