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Fund Spy

Should You Buy These Reopened Funds?

Evaluating the prospects of Vanguard Dividend Growth and three other recently reopened funds.

As a contrarian, I am more interested in getting funds that are reopening than those that are about to close. That's because funds generally reopen when performance is cool and shut when it's hot. I prefer to buy low and sell high, hence the bias toward reopening.

Generally, funds reopen at a time when they are in outflows and management believes that the fund has either shrunk to the point where it can handle more money, or it is suffering so many outflows that it would like some inflows to at least slow down the rate of outflows. A third option is when a fund was originally closed owing to concerns about hot money rather than overall capacity size, and it reopens when things have cooled off.

Reopening is a good time to get reacquainted with a fund that may have been off your radar for a while. To begin with, you want to know why the fund is in redemptions and why it was reopened. From there, it's mainly a matter of assessing whether the fund can get its groove back or something has changed. Let's look at four funds that reopened in 2019.

Vanguard Dividend Growth (VDIGX) reopened Aug. 1, and I was a little surprised. After all, the fund has great long-term performance and a large asset base of $36.6 billion. Poor performance in 2015 and 2016 spurred outflows that began in 2017 and have continued to today. The fund shed $3.1 billion in 2017, $2.5 billion in 2018, and $800 million in the first half of 2019. Yet, because of appreciation, the fund is actually at the high point for assets.

The fund's performance rebounded sharply in 2018 and so far in 2019, so I would guess there's some demand out there that could possibly flip flows into the black. Vanguard explains that outflows and changes in market conditions--presumably the market rallying faster than the fund's assets-under-management growth--give it greater capacity.

So, the bad news is this isn't terribly contrarian, and it certainly isn't a nimble fund. But we give it a Morningstar Analyst Rating of Gold because it has a sound strategy, a strong manager in Donald Kilbride, and very low fees. Most asset managers keep a lot of economies of scale to themselves. Vanguard passes those economies along to fundholders in the form of low fees, so it's hard to begrudge its funds' asset growth the way I would at other firms.

Diamond Hill Small Cap (DHSCX) really is a contrarian play. Like most of Diamond Hill's funds, this one follows a value strategy that has been out of favor, even compared with other value funds. However, this one has fared even worse than siblings, largely owing to massive underperformance in 2016 when it lagged peers by nearly 1,200 basis points and its benchmark by nearly 1,800 basis points. Former manager Tom Schindler raised cash in the face of rising valuations, so he missed out on the rally to a greater degree than his peers.

The fund's slump certainly spurred some action. Fundholders voted with their feet, pulling about $1 billion over four years. And in February 2019, Diamond Hill changed managers. Chris Welch and Aaron Monroe took over, and they pared cash to 4%. Welch has a strong record at Diamond Hill Small-Mid Cap (DHMAX) dating back to its 2005 inception. The fund reopened in April 2019 because it has shrunk to $835 million. We have faith in Welch and Monroe and rate the fund Silver.

Vulcan Value Partners (VVPLX) had a nice run, but slumped in 2017 and 2018. That spurred outflows, but the firm actually cited increased capacity when it explained reopening: "Since closing in 2015, Vulcan Value Partners has made major investments in human resources, systems, and infrastructure. The firm now has a larger and more experienced research staff and has made heavy investments in artificial intelligence. As a result, the firm has achieved greater research productivity, defined in terms of both quality and quantity. The firm has also implemented a new front-end trading and compliance suite and has engaged a new middle- and back-office operations provider. These investments have significantly improved its operational productivity and trade execution. The addition of a data warehouse has also enhanced the firm's performance reporting and analytical capabilities."

It's good to see that the firm has built up its operation on a number of fronts. However, we're not ready to jump in. Manager C. T. Fitzpatrick's stock selection has been too streaky for us to recommend over the years.

Harding Loevner Emerging Markets (HLEMX) reopened in May with total strategy assets down to $18 billion from $20 billion. Emerging-markets stocks don't always have as much liquidity as developed-markets stocks, so it makes sense that this fund was closed for a time even though it mostly invests in large-cap stocks.

Although strategy AUM is down, the fund has performed well in recent years and really hasn't had meaningful outflows. Rather, the outflows appear to have come from the separately managed account in the fourth quarter of 2018. I can't really count this one as too contrarian, though emerging markets in general have lagged enough to be contrarian relative to the United States.

We've maintained our Silver rating because we still like the strategy and the managers who run it. Craig Shaw and Scott Crawshaw employ a quality-at-a-reasonable-price strategy that gives it a nice risk profile. In general, the fund has produced solid returns with moderate levels of risk. The fund has the support of 31 investment professionals, so it ought to have the capacity to manage its current asset level effectively.

 

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