How to Sneak Into a Top-Performing Closed Fund

There are 278 closed funds, according to Morningstar, but only a handful are worth investors’ time, given the many cheap and readily available index fund options. The $50 billion Capital Appreciation fund (ticker: PRWCX) is one. This balanced fund that buys both stocks and bonds has beaten 99% of its Moderate Allocation fund peers in the past 15 years, with a 9.5% annualized return. Its index fund competitor,
Vanguard Balanced
(VBIAX), has generated only a 7.1% return over that period.

Yet the T. Rowe fund has been closed since 2014. How can you get in? Every closed fund has different rules, but most have backdoor entrances. In T. Rowe’s case, the fund shop makes exceptions for its largest customers.

In November 2021, T. Rowe launched its Summit Program, which allows any investor with more than $250,000 at the firm to buy top-performing closed funds like Capital Appreciation. Of course, many investors don’t have that kind of wealth and don’t necessarily want to tie up their assets with one money manager. In T. Rowe’s case, though, its brokerage offers funds from other families, stocks, and exchange-traded funds—and assets in them count toward Summit’s minimum.

It always helps to contact a fund company directly about possible exceptions to closure rules. Also, read closed funds’ prospectuses, as they outline who can still buy. Such is the case with
Artisan International Value
(ARTKX), which has beaten 99% of its fund category peers over the past 15 years. On page 154 of its prospectus, Artisan describes “Who Is Eligible to Invest in a Closed Fund?” As with T. Rowe, if you have at least $250,000 in other funds at Artisan, you can buy this one.

Another entry point is through a financial advisor who is already invested in a closed fund for other clients or who may have access to a still-open institutional share class. Artisan also does this. “Funds can close in all sorts of different levels,” says Russel Kinnel, Morningstar’s director of manager research. “You’ve got all sorts of sales channels out there. [Fund companies] can limit all of them or some of them.”

At the bigger fund shops, the advisory and retirement-plan channels are often left open. Technically, for instance, the top-performing
Fidelity Growth Company
(FDGRX) has been closed since 2006, yet the fund remains open to new investors via these channels.

Unfortunately, some of the best closed funds are those run by smaller boutique management firms, which are often harder to access. To compete with behemoths like Fidelity, boutique fund families often invest in niche areas where a good manager can really add value over an index fund.

This is especially true of closed small- and microcap stock funds. The market for microcap companies is inefficient, with little analyst coverage, so money managers who pick the right stocks can trounce their benchmarks.

Driehaus Micro Cap Growth
(DMCRX), for instance, has produced a 14% five-year annualized return. The
iShares Micro-Cap
ETF (IWC) has produced a meager 1.6% and the
iShares Russell 2000
ETF (IWM), 3.3%. The fund “has been hard closed since July 2018,” says Driehaus spokesperson Carrie O’Donnell. A “hard close” in this case means many existing investors can’t add money to the fund, even advisors. Exceptions are only made for new investors in retirement plans.

Lord Abbett Micro Cap Growth
(LAMGX) provides more leeway in allowing existing investors, as well as retirement-plan participants and employees, to keep buying shares. This loophole may provide a back door for new shareholders. Although usually forbidden if you’re buying directly from a fund company, an existing shareholder of a closed fund at an outside broker can transfer a share to you without the fund company knowing about it. Once in, you can add to your position.

“Even in the strictest limited offering of a fund, if you find someone who owns it and transfers a share, that’s the one way around closure,” a fund rep at a different closed fund acknowledged confidentially.

An imperfect alternative is to find a substitute for a closed fund that either behaves similarly to it and/or is run by the same manager. This March, T. Rowe filed for a prospectus for the Capital Appreciation Equity ETF, run by the same manager as the mutual fund, Barron’s Roundtable member David Giroux. Although T. Rowe hasn’t disclosed the launch date, when the ETF opens it will give investors a chance to access Giroux’s stock picks, but only those. In the mutual fund, Giroux also buys unusual bonds and bank loans. Moreover, the ETF—which will trade under the ticker TCAF—will hold 100 stocks, while Giroux typically holds only 30 to 40.

Some closed-funds have no substitute. The
Invenomic Fund
(BIVRX) is a Long-Short Equity fund that has destroyed its competition, up an annualized 27.3% in the last five years, even rising in down markets. The fund’s hedge-fund-like style and performance are unique. But it has high fees and is only available to existing shareholders, advisors already in it, and retirement-plan participants.

The question is, how badly do you want in?

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