NEW YORK - Julius Baer's all-cap international equity fund has been wildly successful over the past few years, so much so, the company has shuttered it to new investors. But new customers can get access to its winning management team through another soon-to-be launched fund.
The swelling asset levels of the company's original international fund (BJBIX) made it challenging for co-managers Richard Pell and Rudolph-Riad Younes to make further investments in small caps, which currently make up some 18 percent of the portfolio. With total fund assets climbing to more than $12.2 billion, and another $10 billion in separate accounts run on the same strategy, the company decided to close the portfolio May 4.
"We've been finding it difficult to buy significant positions in smaller names. But we still feel comfortable buying large-cap and mid-cap names," Younes said. "So the new portfolio will be limited in focus on the large and mid-cap names, but from a thematic, geographic, sector and fundamental research perspective, it should be very similar."
Pell and Younes, who have been running their fund since 1995, share one of the best long-term records in the foreign large-blend category, said Gregg Wolper, senior fund analyst at Morningstar Inc. One factor that's given them an edge over the years has been their ability to discover smaller firms in emerging markets, especially central and eastern Europe. In some countries, even the biggest, most successful companies are small on a global scale, however. Over time, a large asset base will dilute the positive impact of such investments.
That won't be a problem for Julius Baer International Equity II, which will limit itself to companies with total market caps of $2.5 billion or more. No ticker symbol has been set yet for the new fund, and Wolper said it was too soon to know how well the strategy will translate. One thing it has going for it is that it's not a direct clone.
"It's not that common for a fund to close and then come out with a very similar fund with the same managers," Wolper said. "It's something that can be workable but also deserves to be looked at cautiously. In general, you want to make sure the new fund is different enough, that it won't face the same hurdles as the old fund. In this case, there are differences, so it might work out."
Funds that invest in smaller stocks and are successful often wind up facing what on the surface might seem an enviable problem; they pull in too much money. The problem is there are only so many shares of small stocks available; if a fund gets too large, it becomes difficult to buy enough shares to make a difference in returns. Ultimately, a huge portfolio will simply mimic the performance of the market. This is the "law of large numbers," Younes said.
"If you have $1, it's easy to make it $2. But if you have $1 billion, it's hard to make it $2 billion," Younes said. "All things being equal, if you're using the same style, the less money you have, the more you are able to add value on average. Your transaction costs are lower, you are nimbler, you can get in and get out of your position much more quickly."
Companies may deal with overly large asset levels in several ways, starting with the sort of "soft close" Julius Baer employed - shuttering the fund to new customers but remaining open to existing clients, including those with access through 401(k) plans. Sometimes, however, so much money keeps flowing in, a fund will do a "hard close," accepting no new money, even from existing shareholders.
A third alternative is to raise the minimum investment while keeping the fund open. For example, a company might attempt to slow the amount of fresh inflows by raising the minimum investment from $3,000 to $25,000. This keeps the door open for larger individual investors or advisers who can pool money.
If nothing is done to stop assets from growing to an unmanageable level, performance suffers, either because the fund's managers are no longer be able to invest in the kinds of companies that made them successful, or because money builds up in cash. In the worst scenario, the fund might stray from its strategy into territory outside the manager's expertise, which could lead to poor investments.
It's not always obvious when a fund has grown too large. If you're invested in a fund that has seen substantial inflows in a short period of time, the best clues can be found in the performance, portfolio structure, and even the manager's reports to shareholders, Wolper said.
Size has been blamed for the falloff in performance at Fidelity Magellan (FMAGX), a legendary fund, now closed to new investors, that became progressively less nimble as it grew; it now holds nearly $55 billion.
While it may seem appealing, it's never wise to automatically rush into a fund before it closes, said Wolper. It's very possible that by the time closure plans are announced, performance has already started to suffer, or, in the case of sector funds, the area of the market it focuses on has cooled. That's doesn't always mean it's a bad idea, Wolper said, but a closure is usually a signal for investors to do some homework.
"People have to know when to close, gradually, when they feel like they have enough money to manage and stop," Younes said. "We feel we are halfway there. This new fund will be an offshoot and once we feel we have reached another bottleneck we'll stop and that's it. Some funds wait until they have poor performance for a year or two. We didn't want to do that."
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