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Unlocking the Door to Closed Funds


Musclez is desperate to buy Schroder Ultra Fund: "For anyone interested in making some extra cash, I am willing to pay 10 times the current value for one share," an investor with that screen name recently posted on the fund's bulletin board at Morningstar.com. That would be $440 a share for a fund currently priced at $44. The offer doesn't deter dewsdad84, who bids $1,000 for one share. Another poster, dotkos, thinks $10,000 is a fair price.

All three are searching for a door into a red-hot mutual fund that stopped accepting new investors in December, 1998. Since Schroder Ultra's three-year annualized return, 107.0%, is the best in the entire 6,000 mutual-fund universe, these investors are willing to pay an enormous premium for just one share. Once they get this toehold into the fund, they can buy as many shares as they like at net asset value.

GO TO THE SOURCE. As the jockeying for Schroder Ultra shows, the Internet has given rise to a gray market in shares of closed funds. While such transactions are legal, you should use them only as a last resort. Indeed, many closed funds aren't worth the trouble. "A fund closing is often a sign that too much money is coming in at once, and the manager is having trouble investing it," says Mark Gleason, a Glendale (Calif.) financial planner. For every Schroder Ultra, there's a $14 billion Janus Twenty, down 47.4% in the past year.

If you feel you must gain entry into a closed fund, you should first call the fund company's sales reps and ask if they know of anyone selling shares you can buy or if you can at least put your name on a waiting list to get in. You have a good shot at picking up shares if the fund manager wants to avoid selling stock positions to pay off redemptions or if you have a significant amount of money to invest and can convince the manager you will hold the fund for the long term.

If you have no luck with the fund company, ask friends and relatives if they hold the fund and would be willing to sell you a share at the current price. All they would have to do is fill out a form called a Letter of Instruction (LOI) or Letter of Authorization (LOA) and send it to a mutual-fund broker or the fund company. The document authorizes the transfer of the share to your investment account. Once the share is delivered, you should have the same right to make additional investments as do the long-time shareholders.

Some fund companies erect obstacles to such backdoor deals. Janus doesn't let investors keep transferred shares of a closed fund, requiring them to be exchanged for shares in one of Janus' open funds or for cash. Oakmark Funds will allow transfers only in its closed Oakmark Select fund of shares worth at least $1,000, the fund's minimum initial investment. Caldwell & Orkin Market Opportunity Fund permits one-share transfers but requires the buyer to increase the investment to $100,000 within 60 days or the fund company will liquidate the account. Schroder forbids transfers of its Ultra fund altogether.

Yet even these walls can be surmounted. By transferring shares through a mutual-fund supermarket such as Charles Schwab, the transaction becomes invisible to the fund company. That's because fund supermarkets pool the assets of every client invested in a particular fund into a single "omnibus account." That saves fund companies a fortune in record-keeping expenses but makes it impossible for them to track individual trades. "At the end of the day, each fund is getting only one buy order and one sell order from us," says Greg Gable, a Schwab spokesperson. Supermarkets can enforce restrictions, but with thousands of different funds under one roof, closed-fund transfers are hard to police.

ACCESS FOR A FEE. You can also get into a closed fund through a financial planner who holds its shares. When you become a client, your assets become part of that planner's omnibus account. So he or she can buy shares of the fund for you. I found several planners with access to top-ranked closed funds by e-mailing the National Association of Personal Financial Advisors at info@napfa.org. But that makes sense only if you need a financial planner and are willing to pay the fees.

If you have no recourse but to try the gray market, you can post your offering price on bulletin boards designated for each mutual fund that is tracked by Morningstar.com. Interested shareholders will then contact you privately to cut a deal.

But first, make sure the mutual fund you want is worth a premium. The best-performing closed funds are small or unique. Caldwell & Orkin Market Opportunity is a long-short fund that has much lower expenses than the average hedge fund and a five-year annualized return of 14.4%. Schroder Ultra, Turner Micro Cap Growth, Bridgeway Micro-Cap Limited, and Wasatch Micro Cap are all small-cap funds whose tiny asset bases have enabled them to beat 96% of their peers for the past three years. Getting access to that kind of performance may make the steep cost of entry worthwhile. By Lewis Braham


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