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Marketing Ploy Seen In Closing of Funds

Although using predetermined closing dates to create a sense of urgency among potential investors is an effective method of attracting assets, it is a disingenuous marketing scheme that can alienate investors and advisors, according to industry analysts and executives.

While some funds close once they reach a certain asset level, most funds close on a predetermined date, said Dennis Dolego, director of research for the Optima Group of Fairfield, Conn., a mutual fund distribution consulting company. Under the predetermined date arrangement, a fund will be opened, gather assets and develop a strong performance reputation and then close to new investors for a short period, Dolego said. Very often the fund will then reopen for a predetermined amount of time, he said.

It is an effective method of attracting assets because it creates a certain amount of interest among investors, he said.

"You can imagine that if you had a fund that was performing very well and was then closed, that a limited time period to get in would be an effective tool to gather a lot of assets right away," he said.

It is vital, however that the funds that are set to close on a certain date have a reputable name and strong performance in order to create the sense of urgency, Dolego said.

PBHG Funds of Wayne, Pa., MFS of Boston and American Funds of Los Angeles are three companies that have successfully used this strategy to accumulate assets in their funds, Dolego said.

"It does tend to work," he said. "You do tend to get a spike of inflows."

However, there are pitfalls to using such a strategy, said Scott Cooley, an analyst with Morningstar of Chicago. By setting a closing date to market the fund, a firm runs the risk of alienating advisors and investors who want to purchase the fund after the closing date, he said.

In particular, the tactic tends to bother small, independent registered investment advisers, said Jonas Ferris, CEO and co-founder of of Ann Arbor, Mich. Larger registered investment advisers like Charles Schwab of Denver and Merrill Lynch of New York usually have omnibus or house accounts with each fund they invest in while individual and small registered investment advisers tend to invest their clients' assets as individual accounts, he said. After a fund closes, it only allows existing shareholders to purchase additional shares of the fund, but the larger registered investment adviser clients can purchase shares of a closed fund through the omnibus account,

Ferris said.

Using a fund's closing data as a marketing strategy smacks of used-car sales tactics, said Cooley.

"We usually look at it as a marketing gimmick when a fund company says, We are going to reopen the fund for a month, or we're going to close the fund three months from now," he said. "How do you know you are going to have the amount of money under management that you can handle four months from now? I definitely think that's driven by the marketing departments."

A better approach is to set a fund's closing date when it reaches a predetermined asset size, not some arbitrary date, Cooley said.

New funds will often offer a limited initial offering period in order to achieve a certain asset level at which it makes it easier to manage the fund, said Ferris. By opening the fund to investors for a limited period, a fund manager can collect the assets, and set up the fund, he said.

"You would rather get up to a relatively high asset level that is more or less fixed that increases maybe a few percent a week, not 40 percent a day," Ferris said. "...You would rather have a stable base for the portfolio and that is one way that you can get to it."

However, when funds begin to announce closings two or three months in advance, the tactic is more a marketing scheme than an operational strategy, he said.

"It's only going to bring

in more assets anyway

when the whole idea behind the closing was the fund was too big," Ferris said. " ... It doesn't make a whole lot of sense and it gets into a bit of the marketing schlock mentality."

From 1997 to 2000, the number of funds that closed to new investors increased by nearly 56 percent, according to Morningstar. Thirty-six funds closed in 1997 and 47 funds closed in 1998. Seventy-five funds closed in 1999 and 81 funds closed in 2000, according to Chicago-based Morningstar.

Small-cap funds commonly close in order to maintain efficiencies, but closing also serves as a good marketing tactic for those funds, Dolego said.

"With a small-cap fund, you kind of kill two birds with one stone," he said. IPO funds and high-growth equity funds are other funds that commonly use closings to generate investor interest, he said.