T. Rowe Price Fund Closure Sparks Change in Retirement Saver Portfolios

The better small- and mid-cap funds often come with a hitch: They close to new investors in an effort to protect their managers' ability to maintain their strategies and in turn, to protect performance. In extreme cases, funds close their doors to all new money, even from existing shareholders. Left unchecked, runaway asset growth has the potential to force a manager to take smaller positions or venture into larger companies in order to put cash to work. Both tacks can cause performance to diminish.

Indeed, in

of the April 2 closing of

Morningstar manager research analysts usually react positively when fund companies shutter funds to new money, in that a closure reflects a concern for current shareholders at the expense of fee-generating asset growth. Morningstar has long viewed T. Rowe Price as a firm that successfully balances the interests of its fund shareholders alongside those of its corporate stakeholders. T. Rowe Price International Discovery remains Silver-rated and is a worthy holding for investors who purchased it before the closure.

But the closure creates a quandary for investors on the outside looking in. It also prompted me to revisit my model Retirement Saver mutual fund portfolios, because the goal of the portfolios is for investors to be able to model their own investments after them. Holdings must be open to new retail investors and available without a sales charge.

The Hunt for Worthy Alternatives Before discussing the alternatives to T. Rowe Price International Discovery, some perspective is in order. The fund wasn't a huge position in the portfolios--7% in the Aggressive Retirement Saver, 5% in the Moderate Retirement Saver, and 4% in the Conservative Retirement Saver. The fund also occupied small positions in my Retirement Saver Portfolios that consist exclusively of T. Rowe Price funds.

The reason for the modest position size is that foreign small- and mid-cap stocks are not a core category. Their market value accounts for about a fourth of the foreign stock universe, and most foreign large-cap funds include some exposure to them. In other words, investors don't have to have a fund that's dedicated to them; they can obtain exposure through a broad foreign-stock fund. For example,

But the mutual fund portfolios--in contrast with the portfolios consisting of exclusively of ETFs--hold active funds as well as index products, and I wanted to maintain that mix. Yet I quickly discovered that the pool of worthy small-/mid-cap foreign-stock fund alternatives is pretty shallow. Of the 14 foreign small-/mid-cap foreign-stock funds that are rated Bronze or higher, just seven are no-load and open to new investment. Two of those seven are the aforementioned DFA funds, which are only available through financial advisors who work with DFA. (DFA funds also appear in some company retirement plans.)

I eventually narrowed down the field of contenders to two options:

Both funds land in Morningstar's foreign small-/mid-cap blend category, but there are some important differences. The Vanguard fund tends to emphasize growth stocks (its current style box is mid-cap growth), whereas the Oakmark fund employs the firm's standard focus on companies trading at a big discount to management’s estimate of their intrinsic values. That stylistic difference was on full display in 2017: As growth stocks enjoyed a big rally, the Vanguard fund gained 39% while Oakmark International Small Cap returned 26%. The Vanguard fund employs a multimanager approach, whereas the Oakmark fund is managed by a single team, led by David Herro and Mike Manelli, at Harris Associates. Finally, as a Vanguard fund, International Explorer's 0.38% expense ratio makes it as cheap an actively managed fund foreign small-/mid-cap fund as you're going to find, whereas the Oakmark fund charges 1.36%. That's not ridiculously high in the pricey foreign small-/mid-cap space, but I always hesitate to recommend anything that charges more than 1% per year.

In the end, however, I settled on the Oakmark fund for a couple of reasons. For starters, its emphasis on value helped neutralize a growth bias in the overall model portfolios, whereas Vanguard International Explorer accentuated that bias. And while foreign small- and mid-cap stocks as a group have been hot, the contrarian in me likes that the Oakmark fund hasn't rallied as hard as some of its rivals. Indeed, its three- and five-year returns land in the bottom 25% of its category. Senior analyst Greg Carlson points out that the fund has long been streaky, but my view is that shareholders in active funds make their money by staying put during the lean(er) times.

The most recent versions of the

,

, and

Retirement Saver Mutual Fund portfolios reflect the excision of T. Rowe Price International Discovery and the addition of the Oakmark fund. In the

, I increased the positions in