Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. We've seen a number of mutual funds close their doors to new investors so far in 2021. Joining me today to discuss the trend in general, and some of the more noteworthy closings in particular is Russ Kinnel. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.
Nice to see you, Russ.
Russ Kinnel: Glad to be here.
Dziubinski: Let's talk a little bit first about fund closings in general. Why do funds close to new investors? And when does this generally happen?
Kinnel: Typically, you see a fund close because they're getting so much in assets that it is starting to put strains on their strategy, so that they would either have to change the strategy or close the fund to new investors. That's why we see it. Usually, it's in places where they're investing in less liquid names that are much more sensitive to asset size, but not always the case.
Dziubinski: Is a fund closing generally good news or bad news?
Kinnel: I think it's good news for two reasons. One, it means they're trying to maintain the strategy that brought it success in the first place. And two, it means they're shareholder oriented, because this is one of those places where a fund is really choosing between their short-term profits, and the investor's best interest. For the most part, you're pretty well aligned, but this is one case where there's kind of a conflict. So when a fund does close, it at least says we care about our fiduciary duty, we care about our shareholders. Now, if they close sooner, maybe they care a little more, but it's still a good sign.
Dziubinski: You mentioned earlier that sometimes funds close because they're investing maybe in less liquid markets. We sometimes do see U.S. small-company funds close. And we have seen that this year. There have been a couple: Columbia Small Cap Growth and Franklin Small Cap Value. We cover both of those funds. So, let's unpack why small-cap funds might be more prone to close, and then talk a little bit about these two closings in particular.
Kinnel: So, small-cap strategies. Small caps really do trade a lot less than large caps. If you think about right now we have massive trillion-dollar companies. And, of course, you can trade those all day long. But if you're talking about a company that's $1 billion or $2 billion, which is kind of the sweet spot for most small-cap managers, there's just not that much liquidity in it. So, you are probably already having some impact when you trade that stock. And as you get bigger and bigger, you're having more impact. It's really an area that's sensitive to asset size.
Dziubinski: And then we've also seen, though, several U.S. large-company funds close this year, which doesn't have the same liquidity issue. I'd like to talk about those. JPMorgan Equity Income, Morgan Stanley Institutional Growth, and Diamond Hill Large Cap all stopped accepting new money. Is this a sign that the overall market is frothy, because they're all more large-cap-focused funds? What do we make of this?
Kinnel: Maybe it is a little bit. Though, I also think it means active investors are very selective. So, there's a lot of money going into a lot of index funds. Only the most successful active funds have the problem of too much money, most of them are struggling with outflows. These three funds have done very well. Two of them are relatively focused funds, Morgan Stanley--Dennis Lynch's fund--and Diamond Hill. I think the issue there is that they didn't want to get less focus. They didn't want to have to buy 20 more names on their list. I think that's what's going on there. JPMorgan Equity Income is up to about $90 billion-plus in the strategy overall. So, a massive sum. For large caps, eventually, asset size can become an issue. You see, sometimes they'll close at very high level. And that's what JPMorgan has done. It's not a super focused fund, but again, they're trying to buy dividend-paying stocks, which is a smaller pool than the whole large-cap universe, and at that kind of asset level it makes sense.
Dziubinski: On the international front, Artisan closed a couple of its international funds, International Value and International Small-Mid. Is this more of an instance where it's more of a fund-family-specific thing rather than some broader statement about international stock markets right now?
Kinnel: You're right, international is not that hot. But Artisan is a place that brings in managers and says set up your own boutique, and you're very much in control. And that includes getting to decide on the asset size. And some managers actually come to Artisan in part because they have that freedom, whereas maybe their previous funding company wouldn't let them close at that asset level. So, that's definitely part of the appeal with those funds.
Dziubinski: And then there was an interesting one. This one really stood out to me, and to you before we talked about this: The largest strategy in the high-yield muni bond category, which is Nuveen High Yield Municipal Bond, is going to close to new investors in September. And it just isn't very common for municipal-bond fund of any type to close. What's behind this one?
Kinnel: That's right. So, bond funds in general, it's very rare to close. If you're running a high-quality fund, you can buy Treasuries and mortgages all day long, even high-quality corporate issues. But high-yield muni, you're talking about an area that doesn't have [liquidity]. Munis, in general, have less liquidity, high-yield munis maybe even a little less. But also, there's a fairly limited pool. The Nuveen fund's up to about $20 billion AUM, so very large. And you just don't have those economies of scale like you would with, say, a U.S. large-cap company. So, more money means you need to research more names, find more attractive stocks, or bonds, maybe you have to hire more analysts. So, it is much more asset size sensitive, it's not as liquid. And of course, the supply of good high-yielding munis is relatively limited. So, it makes sense in that context, even though it's pretty rare.
Dziubinski: And then lastly, Russ, are there any fund categories today where you might expect to see more closings? And why? Or are there any specific funds that you think might be closing on the horizon and why?
Kinnel: I think U.S. small caps is probably where we'll see the most action. They've performed pretty well this year. If they keep performing well, we'll see some more closings with the most popular funds. Again, most small-cap funds are still in redemptions, but we have seen performance improve, so I think it's just natural, particularly in small growth, which has done much better than small value over the last five or 10 years. That's probably the place we'll see the most closings.
Dziubinski: Well, Russ, thank you so much for your perspective and time today. We appreciate it.
Kinnel: You're welcome.
Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.