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