Some investment strategies work well whether the total assets under management (AUM) is small or grows to many billions. However, specialized approaches such as actively managed small-cap value mutual funds can become difficult to manage effectively if assets grow too large. In these cases, the fund management company may decide to close a fund to new investment for a period of time in order to maintain the fund’s investment style and flexibility. How does this affect you as an investor?
Investors in traditional open-end mutual funds are buying and redeeming shares directly with the fund. The fund advisers are normally paid an advisory fee on a sliding percentage scale that may decrease as AUM increases, but the total fee collected grows. Occasionally, some portion of the fund adviser’s fees is subject to the fund’s performance relative to the market.
While advisers collect greater fees if AUM grows, larger funds are not always in the best interest of the mutual fund investor. So, fund size matters, but whether larger is better than smaller depends upon the investment objective of the fund. With a large stock index fund, the more dollars under management the better. This is because it operates in a very liquid segment of the market, where large transactions are less likely to impact share prices. Furthermore, since some fund expenses are fixed, spreading these expenses over more investment dollars should reduce expenses as a percentage of fund assets.
On the other hand, funds with investment objectives that cover less liquid market segments (small stocks or emerging markets) can grow too large. Transacting into and out of securities in these segments can take time and be costly, making portfolio changes difficult to accomplish. It is common to see small-cap funds move into the mid-cap segment if AUM grows too much. This is especially true with actively managed funds where the managers are picking specific stocks and sectors and changing their investments more frequently.
A fund management company may decide to close the fund to new investors if it determines that it can no longer effectively maintain its investment style and flexibility due to the size of AUM. That is normally good news for the investors holding the fund, as it is placing the interests of the investors over the advisory fees collected from a larger fund.
A+ Investor subscribers can quickly see if any fund has recently been closed or reopened to new investors on the Mutual Fund Ideas page, under the Investing Ideas tab. The Fund Openings/Closings link is near the top of the Funds page.
Alternatively, you can select the Fund Openings/Closings link directly from the Investing Ideas drop-down menu.
To check the status of an individual fund, type the ticker in the Search box at the top of any AAII.com page and select the fund from the drop-down list to open the Fund Evaluator. The first section of the fund Overview tab notes the status of the fund as open or closed.
