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Popular Equity-Income Fund to Close

Schwab International Index fund gets a new benchmark and more.

Morningstar Fund Analysts, 11/04/2011

In an unusual move for an equity-income fund, American Century Equity Income TWEIX will be closing to new investors at the end of the month.

Some equity-income funds are enjoying greater popularity as investors scour the market for yield amid anemic interest rates. While estimated net inflows into American Century Equity Income have been respectable in the past year, inflows into much larger rivals, including BlackRock Equity Dividend MDDVX and T. Rowe Price Equity Income PRFDX, actually have been more robust, according to Morningstar data.

American Century Equity Income has $9.1 billion in assets and there is about $10 billion in the strategy overall, including separate accounts and other accounts, according to American Century. T. Rowe Price Equity Income's total assets are $19.4 billion and BlackRock Equity Dividend's total assets are $16.4 billion. Considering equity-income funds usually invest in numerous large-cap stocks, which are highly liquid, large asset size typically doesn't threaten their strategy execution.

However, American Century Equity Income devotes a portion of its portfolio (usually about 20% of assets) to convertible bonds. Convertible bond issuance has slowed in the U.S. over the last couple of years as persistently low interest rates have led firms to issue straight debt instead. In fact, the shrinking convertibles market led to the closing of Calamos Convertible CCVIX, the largest open-end convertibles fund, earlier this year.

Though American Century said that the equity-income fund is closing to maintain its strategy's efficacy, it's likely that the convertibles stake played a role in that decision. A similar fund run by the same managers in a similar style (but without the convertibles), American Century Value TWADX, is not closing. The firm said it estimates that fund, currently with $2.1 billion in assets, still has about $10 billion in capacity remaining.

Returns of American Century Equity Income have been much better than those of most other large-value peers over the long term, and its volatility has been much lower than its average peer partly because of its convertibles stake. The fund's five-, 10-, and 15-year trailing returns all land in the large-value category's top decile. It held up far better than most rivals in the bear market from late 2007 to early 2009.

The closing will occur Nov. 30, though shareholders as of that date will be allowed to continue investing in the fund. That said, investors should not rush to get into the fund without investigating it carefully to see if they're comfortable with its strategy. Because of its managers' cautious approach and the convertibles stake, the fund can lag in stock-market rallies. In 2003, it was 4 percentage points behind the large-value average, and in 2009 it trailed by 12 percentage points, landing in the bottom decile of the category in both years.

Schwab International Index Ditches In-House Benchmark
Hoping to appease investors, Schwab International Index SWISX is tossing its proprietary benchmark in favor of the widely used MSCI EAFE. The $1.4 billion fund will officially make the switch on Dec. 20, 2011.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.
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