Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Amid ongoing outflows from actively managed mutual funds, the number of closed funds has shrunk. Joining me to discuss this phenomenon is Russ Kinnel. He is director of manager research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Happy to be here.
Benz: Russ, let's talk about what's going on in terms of funds closing and reopening. You say that over the time that you've been looking at the mutual fund universe, the number of funds that are closed currently is pretty small relative to historic norms. Let's talk about that.
Kinnel: That's right. And you mentioned outflows, and that's really the story here is that normally after a long-running bull market like we've seen, you'd see a lot of funds closed to new investors because they don't want the asset growth to impact the way they manage the fund. But of course, we've seen so much money flowing out of actively managed funds that you don't have as many closed funds as normal. And of course, it's rare that you ever have to close an index fund. So, index funds can handle all that inflow without a problem. So, it's really an unusual point in time.
Benz: From an investor's standpoint, does it make sense to look at a fund after it's reopened? Can that be a signal that maybe the manager is finding stuff to buy? Does that tend to be an opportune time to buy into a fund, based on your experience?
Kinnel: Yeah. I'm enough of a contrarian that I like funds when they're reopening even more than when they are just about to close because usually they are reopening after their asset class has cooled off, just as they're closing usually when their asset class is red hot. So, it's a little more of a nice contrarian buy signal when they are reopening because they are usually reopening because they are in redemptions and usually the redemptions are following a dip in performance.
Benz: So, you have brought a few funds that are good quality funds that have reopened in the recent past. Let's discuss them. A few Oakmark funds have reopened. Let's talk about those.
Kinnel: Sure. Oakmark International and Oakmark Global have both recently reopened. The funds had some down performance that led to outflows, but there wasn't really a bit bout of underperformance. But now they are reopening. We weren't really that worried about the underperformance. These are focused funds with a distinct value bend, so, it's a given that you're going to have a year or two of underperformance, and of course, they actually came back really nicely in 2016. So, we still have a lot of faith. We rate both the Oakmark International and Oakmark Global Gold. So, clearly, we have very high confidence in them despite the fact that it had little outflows.
Benz: And David Herro was one of Morningstar's managers of the year for 2016.
Kinnel: That's right. David Herro is a manager on both these funds. He manages alongside Clyde McGregor on the Global fund and he is the lead on International. The only other development we've seen, Rob Taylor stepped off the Global fund about the middle of last year, and that's when Herro took over. Also, Oakmark has made more clear their succession plans by naming comanagers on these funds as well as some others. But really, the core is, you still have some really good stock-pickers and even a little outflows I don't mind, because I kind of don't mind them getting a little bit smaller than they were.
Benz: Artisan Mid Cap Value is another fund that recently reopened. Let's talk about that one.
Kinnel: That's right. Artisan Mid Value reopened in November 2016. And unlike the Oakmark funds, I would say, its underperformance was a little more marked. In 2014 and 2015, it really underperformed because its value orientation is kind of to look for cyclical names, doesn't want a lot of depth, but they tend to like cyclical names both in areas like energy and financials and tech, and that wasn't really good place to be in those years. It came back pretty nicely in 2016. But in any case, it had substantial outflows as a result of that underperformance.
Benz: And this one you think is one to look at?
Kinnel: For sure. We rate it Silver. We still have a lot of confidence in James Kieffer and that strategy. We just think it was one of those cases where the strategy was out of favor, but we didn't see any fundamental problems there.
Benz: Now, among the funds that are still closed to new investors, when you look across that list, Russ, it may be in the Morningstar FundInvestor 500, for example, do you see any commonalities among those still closed funds?
Kinnel: Yeah, I see a few things. Naturally, most of them are in small- and mid-cap areas because that's where liquidity is a bigger issue. Large caps tend to be able to run much larger. But also, I think, maybe more importantly, I see good stewards because when you think about closing a fund, you're essentially saying, I'm going to protect my existing shareholder base even though keeping the fund open would allow me to make more money in the short term by collecting more fees. So, really, you see, I think, good stewards who are really aware of what they need to do to keep investors protected. They think about their fund's capacity well before it comes time to close. And so, you really see both of those. And I would also add there are a lot of medalists, too. We like a lot of these funds that are closed.
Benz: Among that list--I'm going to put you on the spot--can you name any of the funds that if they were to open tomorrow that you would be right there ready to send in a check?
Kinnel: Well, certainly, there's a lot of Primecap funds that are still closed to new investors, Primecap Odyssey Aggressive Growth, Primecap Odyssey Growth, Vanguard Primecap, those are all great funds. T. Rowe Price Mid Value, our manager of the year, David Wallack, is another really good one. There are quite a few really strong ones in that group of closed funds, and because of the way the trend has worked, certainly it could well happen that some of those will reopen.
Benz: OK. Russ, thank you so much for being here to discuss funds that have recently reopened to new investors.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.