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As passive investing becomes chic, outflows have increased from closed funds — which are now looking to open again.
Managers of actively run funds can’t seem to get a break these days, and that includes closed ones.
With the rise of passive investing, their business model and sales pitch for active management have come under seemingly constant attack. The latest domino: funds that had previously been closed to new investors. These funds — often run by prominent managers — have seen outflows on par with open active funds. It’s leading them to reopen their gates once again. For some out there, this gives an opportunity to buy.
In a closed fund, the managers have decided not to accept new investors. This typically means that the popularity of a manager or a fund grew due to outstanding performance, leading investors to clamor. Once the assets under management become too large, the managers can’t safely deploy it, so they close access.
“You close a fund to manage capacity,” said Russel Kinnel, director of mutual fund research at Morningstar.
Since small-cap funds require less cash to invest in the names they hone in on, they’re more prone to this practice. That’s because it’s either closing the fund, deciding to invest in larger names or make riskier selections in the companies within their small-cap investment pool.
Once a fund closes, it will almost inevitably one day open again, since the natural life cycle of investors — such as hitting retirement age — will lead to outflows that outpace inflows. But as passive investing has become the chic tactic, outflows have increased.
In July the rate of outflows from U.S. actively managed equity funds reached $19.6 billion, up from $14.6 billion in June, according to Morningstar. And over the past year, $245 billion left active U.S. equity funds, compared to $283 billion heading into U.S. equity index funds. Closed funds aren’t immune to this trend, and one reason some must seek investors again.
“It takes shorter and less painful bouts of underperformance to spur those outflows,” said Kinnel.