Will These Hot-Selling Small-Cap Funds Close in 2011?

It's fund-closing season. We are nearly two years into a strong market rally and the fund closings are starting to come fast and furious. IVA, Calamos, Wasatch, Perkins, and WHG are among the fund companies to have closed a fund.

To get a handle on some possible closings this year, I pulled up a list of still-open small-cap funds with sizable inflows in 2010. Funds typically close in order to avoid growing too large to effectively employ their strategies or to stem the tide of inflows, which can present problems regardless of total assets under management.

I wouldn't necessarily rush to get in simply because a fund is closing, but if you had your eye on the fund, consider this a nudge to decide sooner rather than later. The reason you don't need to rush is that there is something of a contrarian indicator in closings. They typically happen when a fund's asset class and/or strategy are riding high. Generally, performance after a fund closes tails off a bit, though it would have been worse had the fund not closed.

Here, then, are the small-cap funds with the greatest 2010 inflows, along with my guess as to whether they will close. I have left out index and institutional funds.

 Janus Triton (JATTX)
2010 inflows: $710 million
This fund operates on the border territory between small-cap and mid-cap, with a targeted cap range between $1 billion and $4 billion. As a result, it should be able to handle a little more money than a typical small-cap fund. Currently, it has $1.2 billion in assets. Managers Chad Meade and Brian Schaub have produced outstanding results in four years at the fund, applying a fairly straightforward growth strategy. They run a relatively diffuse portfolio, which should also help with asset growth. On the other hand, flows are accelerating, as the fund took in $400 million in the fourth quarter of 2010 alone. A couple more quarters like that and they may well close.

 Fidelity Small Cap Discovery (FSCRX)
2010 inflows: $686 million
Chuck Myers is one of my favorite managers at Fidelity, and his strong performance is gaining attention. His investment style is more Buffett than Peter Lynch, as he is a patient and focused investor. The fund is now up to $1.2 billion, which is sizable by small-cap standards, but is far from a rainmaker at Fidelity. My guess is the fund will be allowed to grow a bit more before closing. However, Myers' style seems to suggest that this one should be closed sooner than other Fidelity small-cap funds.

Wasatch Emerging Markets Small Cap (WAEMX)
2010 inflows: $669 million
This newish fund has put up big returns, so it's no surprise that it's drawing cash. Consider its three calendar-year performances: negative 57%, 118%, 41%. That works out to a 12.2% annualized three-year return and tops the emerging-markets category. Those annual returns tell the story pretty well about what happens when you take a volatile asset class and then buy small-cap stocks in it. The fund is up to $849 million in assets. That leaves some room for it to grow, but Wasatch is pretty vigilant about closing funds.  Wasatch Small Cap Growth (WAAEX) just closed with assets at $1.4 billion. While I can see why emerging-markets small caps are exciting, I can't be really jazzed about a fund charging 2.06%.

 Royce Special Equity (RYSEX) 
2010 inflows: $609 million
Charlie Dreifus has closed this fund in the past, so it's a pretty good bet this fund will close in 2011. Dreifus' cash stake has grown to 16%, as he's not the type to buy at unattractive prices just so he can be fully invested. However, the fund had a sluggish finish to 2010, and that led to flows tapering off to $136 million in the fourth quarter. If they slow further or stop in the first quarter of 2011, then he might not close. Either way, this is an outstanding fund. Dreifus is a brilliant investor who digs deep into a company's balance sheet to make sure he's getting a healthy firm. You can see the benefits in the way the fund mitigated losses in the past two bear markets.

 Oakmark International Small Cap (OAKEX)
2010 inflows: $404 million
Precedent makes it a good bet this fund will close again. The fund first closed in 2002, when assets were around $350 million. In 2007, the fund had more total assets, but redemptions of approximately $320 million prompted management reopen it. Oakmark has recently tightened the spigot by stopping new flows from fund supermarkets, but that might not be enough, as the fund now holds $1.6 billion. As to why you'd want to buy the fund, David Herro's long track record illustrates his skill at finding good, cheap names all over the globe.

 Goldman Sachs Small Cap Value  (GSSMX)
2010 inflows: $400 million
I'm not quite sure what to make of this fund. Most of the names on this list have stellar trailing returns, so it's easy to see why they'd have big inflows. This fund, though, has consistently tracked the category average on a yearly basis, with the exception of 2008. That year, it finished in the top 20%, but its trailing returns are still middling. Defense is a fine reason to pick a fund, but it doesn't usually inspire big flows. So, I'm not sure if they'll taper off or continue strong until they close it.

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