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Three Great Funds Back in Circulation

Investors have chance to take advantage of reopened funds, which tend to perform well. 

Russel Kinnel, 08/22/2006

This article originally appeared in Morningstar FundInvestor, an award-winning newsletter that presents investment strategies and tracks 500 funds.

A few years ago, I ran a study that looked at funds that had closed to new investors only to subsequently reopen. I found that performance tended to tail off after a fund closed and pick up when it reopened.

The reason for this is timing, not asset size. The timing of openings and closings says something important about the attractiveness of the types of stocks that the fund buys. In short, a fund's stocks tend to be pricey when the fund closes and bargain priced when it reopens.

My study is especially relevant right now. Three funds that I like have recently reopened. It tells me that even in value areas there may yet be bargains. Of course, the flip side of this is that funds typically reopen after a period of underperformance--that's when their holdings look cheap, after all.

Longleaf Partners International LLINX

This is what I want to hear when a fund reopens:

"In the 19 months since the fund closed, we have found a number of compelling investment opportunities. The recent volatility in markets around the globe has produced additional high quality companies that are adequately discounted, and a number of existing holdings are attractively priced. The fund's cash level has decreased from over 30% to under 5%.

"The portfolio currently holds a combination of the most vested corporate managements and more quality holdings than at any time in its history. Cash inflows received from opening the International fund will allow shareholders to own more of these franchises and position the fund to take advantage of future volatility. New purchases will decrease the fund's price/value ratio. A lower P/V increases the margin of safety in the portfolio and improves the long-term return potential for all of our partners in the fund. We are adding significant personal capital to Longleaf International."

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