The velvet rope is dropping in front of more mutual funds.
Some smaller corners of the market have stalled recently, even as the Standard & Poor's 500 index closes in on its record high. That means some fund managers are once again welcoming new investors, after they had closed their funds years ago to new money.
More than a dozen mutual funds have reopened their doors over the last year, according to data compiled by Morningstar. The number doesn't include funds that have partially re-opened -- those that still bar new entrants but allow longtime investors to add more money.
Funds reopen to investors when they're looking for new cash to invest. That usually comes after assets have shrunk because their corner of the market has broadly struggled or because the fund's managers have made poor investment choices. In 2008, when the financial crisis sent global markets plunging, at least 46 mutual funds reopened to new investors.
The funds that have reopened over the last year cover a grab bag of categories, including natural resources and dividend-paying stocks. But more than a quarter of them focus on small-cap stocks, which hit a wall last year. Small-caps had their worst performance in 16 years relative to large-cap stocks.
"You look at the market as a cycle, and there tend to be times to sow and times to reap," says Buzz Zaino. He's the lead portfolio manager of the Royce Opportunity fund, which has closed twice since 2003 when the small-cap market was hot and buying opportunities were scarce. It has also reopened twice, when the market was down and cheap stocks were easier to find.
Analysts generally see it as a sign of good stewardship if a fund closes before growing too large. A bigger pile of assets can mean more fees for fund managers, but it also forces them to use it. Stock pickers can run out of ideas they feel strongly about if they have too much cash. Another danger for small-cap stock funds in particular is that a fund could build up too big a stake in a single stock, which makes selling later on more difficult.
One of the latest funds to reopen is the Perkins Small Cap Value fund, which has a silver analyst rating from Morningstar. The fund closed to new investors in 2010 when a rush of interest was pushing its asset level higher.
That's because the fund easily beat competitors for three straight years through 2009 by focusing on high-quality, small-cap stocks that hold up better during downturns.
Since closing, assets for the Perkins Small Cap Value fund have shrunk to roughly $1.7 billion from a peak of close to $3.5 billion. Its investing style held it back in the years following the financial crisis, when low-quality stocks surged. The fund lagged the average return for its category in 2010, 2012 and 2013. Then in 2014, small-cap stocks stalled due to worries they'd become too expensive relative to their earnings.
In mid-2014 the fund began considering reopening, says co-manager Justin Tugman. The slowdown for small-cap stocks meant that valuations were looking more attractive, and the fund's managers saw more potential buying opportunities.
Another co-manager of the fund, Tom Reynolds, says that in the past six to nine months, the team has been analyzing 10 to 15 new stocks a week as potential purchases.
The fund reopened to new investors at the start of last month.
So, does it pay to invest in a newly reopened fund? One consideration is that it's typically a contrarian investment. Funds usually reopen only after struggling, whether that's due to the market they focus on or their own missteps.
The best-case scenario may be the Tweedy, Browne Global Value fund. Since reopening in 2008, it has produced an annualized return of roughly 5.5 percent. Over the same time, the average foreign, large-cap value stock fund has lost 0.1 percent annually.
But it's close to a flip of a coin as to whether the fund will outperform its peers. Among 226 mutual funds that have reopened to new investors since 2000, 112 have gone on to do better than the average fund in their category. That's almost exactly 50 percent.
Another consideration is that a newly reopened fund could close if it gets hot and assets run up again. It may seem like an odd bit of altruism for a fund to close down when it could reap more fees by staying open. But don't think that it is.
"There is no such thing as altruism," says Royce Opportunity's Zaino. "You're doing it for your own health over a longer period of time. You want to maximize your returns, and that's part of the process."