4 Strong Funds Reopening for Business

Christine Benz: Hi, I'm Christine Benz from Morningstar.com. Investors continue to flee actively managed mutual funds, but Morningstar's director of manager research, Russ Kinnel, believes that some recently reopened funds may actually be worth a look.

Russ, thank you so much for being here.

Russel Kinnel: Glad to join you.

Benz: Russ, let's talk about why funds reopen to new investors. It seems that when assets get below a certain size, that prompts them to reopen. But what's the general reason that drives these reopenings?

Kinnel: That's right. Funds close because of inflows and asset bloat, and so it's the reverse that leads them to reopen. If they're getting outflows that are large enough to be a problem, they might reopen. Or more often, it's just assets have shrunk to the level where they feel like they could take in more money and still manage the portfolio effectively.

Benz: So have you taken a look at this issue of whether a lot of reopenings could be a contrarian indicator, either for a given fund category or for the market as a whole?

Kinnel: Yes, I have, though I would say the data is not complete enough to really say that it's certainly a good time to invest. Anecdotally it appears that that's the case because funds tend to reopen when the fund strategy and their asset class are under pressure. So in a way, it's the reverse of when funds close, they're saying, "We're out of style. We're not very popular right now." So often, it is a good time to invest. Though certainly, I wouldn't imply that this moment is necessarily a good time. In other words, a fund might reopen halfway into a bear market. And again, we don't know--we could have another leg down. So it's not a perfect timing vehicle, but generally, it's a pretty good sign.

Benz: Are you seeing the reopenings concentrate in any particular style of funds?

Kinnel: Definitely. Small-cap and value. Small value in particular because small value has been underperforming for 10 years or more. It was underperforming for a long time prior to this year, and then this year it really bore the brunt of the sell-off. So things--its underperformance relative to the rest of the style box actually got worse. And of course, small value is sensitive to asset size anyway. So it's an area where are you often have funds closing. So we've seen a lot of good small value funds reopened.

Benz: Let's talk about taxable investors, Russ. Is there a risk if someone's looking at one of these newly reopened funds, that if it continues to see outflows and they're in a taxable account, that they could get socked with a capital gains distribution either later this year or perhaps even sometime mid-year this year. Is that a risk factor?

Kinnel: It's only a modest one after a bear market because a lot of those capital gains are no longer there. A lot of what they might sell could well be sold at a loss. So it's a diminished risk, but it's a real one. And I think one of the things to look at would be the rate of outflows. The four funds we're going to talk about today do not have very dramatic outflows. But if they're really big outflows, then you're right, that's a bigger concern. If we're not coming after a bear market, then that would also be another reason for a concern.

Benz: So let's dig into some of the highly rated funds that have recently reopened, starting with T. Rowe Price Mid-Cap Value TRMCX. That's a Gold-rated fund. Let's talk about why you and the team think so highly of it.

Kinnel: It's run by David Wallack, who won Manager of the Year a few years ago. He's just got a long track record of being this very consistent, disciplined value investor. Just really stuck to that mid-value space, but very good fundamental work behind that. We tend to think of T. Rowe a little more as a growth shop, but Wallack's really carved out a niche for himself as a really good value investor. I wouldn't have guessed that this fund would reopen, so it's great to see it reopen because it's really one of the best mid-value funds out there.

Benz: Another fund that you and the team liked that has recently reopened is Fidelity Small Cap Discovery FSCRX. This is a small-blend fund. It's Silver-rated. It really got creamed recently, but you and the team like it quite a bit. Let's talk about what you and the team think are its attractive attributes.

Kinnel: That's right. If you see the rating and you look at year-to-date performance, you'll wonder what we were smoking. But there are actually reasons. Derek Janssen runs his fund in a very good, Buffett-influenced value style. I think it's really appealing. The problem it's had this year is that it's on the small value/blend border, but it's in the blend category. And as I mentioned, small value has been the hardest hit performance-wise. It's got some financials and energy and other overweights relative to peers. So in a lot of ways it's the wrong spot, but he's a good manager with a good track record. We liked this strategy, though it ended clearly out of favor at the moment.

Benz: Artisan International Value ARTKX is also on your list. This is a fund that is Silver-rated. It recently underwent a little bit of a transition on the manager team. Let's talk about that.

Kinnel: That's right. Artisan International Value and Artisan Global Value have long been run by the duo of Dan O'Keefe and David Samra, former Oakmark veterans in a value strategy. A year ago they split, or maybe it was two years ago--late 2018, I think--they split into two separate camps. Some analysts went with Samra, some with O'Keefe. Now O'Keefe runs the Global Value with some analysts. Samra is running this one. So you see it right there. Those two have now split. But we do still think highly of Samra and the analysts he's got with him. So it's still an appealing fund.

Benz: Finally, I want to touch on a growth-oriented fund, Wasatch Small Cap Growth WAAEX. This one reopened. Let's talk about why you and the team like it.

Kinnel: Small growth is kind of Wasatch's sweet spot. They've just got a long history of really doing well in small growth. And JB Taylor has a great record. Taylor's looking for companies with the potential to double their stock price in five years. But he also looks at things like cash flow and strong management, and those are the things that keep it grounded from avoiding the most speculative fare. So even though it can run pretty nicely on a growth rally, it doesn't go all to pieces when growth is out of favor.

Benz: Russ, it's always great to get your insights. Thanks for sharing a look at some worthy recently reopened funds. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for morningstar.com.