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Article Considers Appropriate Asset Levels When Closing Fund to New Investors

A recent article by Russel Kinnel, director of manager research for Morningstar, explored questions such as: “When should a fund close to new investors?” and “How do you know when a fund has outgrown its capacity?” The article observed that holding too many assets in a fund can cause a performance slump and that while closing a fund in the short run may reduce profits, in the long run, doing so may improve the chances for sustained outperformance. Funds tend to rely on their portfolio managers to judge proper closing levels based on historical data and other factors. The author constructed general guidelines on asset size by grouping funds by market-cap and then gathering the median and average asset size at the time of closing. His guidelines included the following:

  • For U.S. small-cap funds, the median closing point was $1.3 billion and the average closing level was $2.2 billion.
  • For U.S. mid-cap funds, the median closing point was $3.1 billion and the average closing level was $5.6 billion.
  • For U.S. large cap funds, the median closing level was $6.9 billion and the average closing level was $12 billion.