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Are These Small-Cap Gems Set to Reopen?

This screen finds intriguing small-cap funds that you may want to keep on your radar.

Small-cap funds generally had the wind at their backs from 2000 through the early part of 2007, and their asset bases swelled as they racked up big gains and gathered new money at a rapid clip. Many of our favorite small-cap funds closed to new investors during the period, a move that often is in the best interest of shareholders. Essentially, portfolio managers have an easier time nimbly executing their strategies when a fund's asset base is reasonably sized. For example, if new money continued to pour into the fund but the manager's best ideas were too expensive, cash would build and returns could suffer in a market rally.

In 2008's market downturn, closed funds faced different challenges. When funds aren't accepting new money, there aren't any inflows to offset potential redemptions by frustrated shareholders, and funds may be forced to sell falling securities in order to meet redemptions. To avoid such a situation, we saw some of our favorite small-cap funds reopen their doors, including Analyst Picks  Vanguard Explorer (VEXPX) and  Third Avenue Small-Cap Value (TASCX). To point to other high-quality funds that may be on the verge of reopening, we crafted a search using Morningstar's  Premium Screener.

To set up this screen, we started by searching for closed domestic small-cap funds run by skilled stock-pickers. So, we selected the small-value, small-blend, and small-growth categories, and we also screened for funds with top-third category rankings over the trailing 10-year period. In order to find funds that have the potential to reopen, we selected funds that have made an effort to stay small--those with asset bases of less than $1 billion. And as per our usual, we required that the funds have below-average expense ratios.

This screen pulled in  Bridgeway Ultra-Small Company (BRUSX), which has been hurting more than most of its small-growth peers lately. Its suffering stems from the beating that micro-cap stocks took during the downturn, but we think that the fund has a good shot at roaring back when stocks of the tiniest firms are back in favor. Long-term shareholders in this fund know that it is highly volatile, but we think that they are in good hands with the quantitative stock-picking process monitored by manager John Montgomery. As of Oct. 31, 2008, the fund reopened its doors to current investors who purchase the fund directly through the firm. And if it were to reopen to all investors, we'd certainly consider this a good time to buy in.

Another solid fund that popped up on this screen is  Schroder U.S. Opportunities (SCUIX). This reasonably priced small-growth offering has one of the most attractive long-term risk/reward profiles in its category. Manager Jenny Jones has demonstrated her stock-picking prowess, and she's supported by a team of skilled sector analysts. The fund's relative performance bested more than 90% of peers in 2008, though the 31% loss certainly took a chunk out of the fund's asset base. We'll be keeping an eye on this one.

Here are some of the results as of Feb. 2, 2009:

 Bridgeway Ultra-Small Company (BRUSX)
 Columbia Small Cap Core 
 Loomis Sayles Small Cap Value (LSSCX)
 Morgan Stanley Institutional Small Company Growth (MSSGX)
 Perkins Small Cap Value Institutional (JSIVX)
 Schroder U.S. Opportunities (SCUIX)
 Turner Emerging Growth Investor 

To run this screen yourself, click  here. Don't have a Premium Membership? You can still use our Premium Fund Screener by taking a free, 14-day trial.

You can sign up for a Morningstar "fund reopening" alert on any or all of these tickers. Simply visit our E-mail Subscription Center, input each ticker you would like to track, select "Fund opens/closes to new investments" (under Fund Nuts & Bolts) and click "Submit."

Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.