2 More Small-Stock Funds Closing

The advisors of two popular small-stock mutual funds said Monday they will close them to new investors, the latest in a series of closures affecting one of the market’s few profitable sectors this year.

Boston-based Fidelity Investments said its Fidelity Low-Priced Stock Fund won’t accept any new investors for six months starting May 16, while Chicago-based Harris Associates said its Oakmark International Small Cap Fund is closing indefinitely starting Friday. Existing shareholders will be able to continue investing money in both funds.

The problem is too much of a good thing: The funds’ success is attracting more money than the managers can invest prudently, the companies say. Fidelity Low-Priced Stock is up 10.3% this year while Oakmark International Small Cap is up 15.5%.

Smaller stocks have held up far better than larger ones during the bear market of the last two years. So far in 2002, the Standard & Poor’s small-cap 600 index has gained 8.5% and the S&P; mid-cap 400 is up 3.7%, while the large-cap S&P; 500 is down 8.3%.

Net inflows and appreciation have combined to swell assets of small-cap equity funds by $64 billion since the market’s September lows, to a total of $244 billion, said strategist Thomas McManus at Banc of America Securities in New York, noting that small-cap value funds have been especially hot. Inflows measure purchases minus redemptions.

Hot small-cap funds that have closed in recent months include Buffalo Small Cap Fund, Wasatch Core Growth and Franklin MicroCap Value.

Fidelity’s closing will give manager Joel Tillinghast time to invest the cash pile that poured in as the fund beat 89% of its small-cap value peers in the last 12 months, according to Morningstar Inc. Fidelity Low-Priced Stock grew to $15.7 billion as of March 31 from $6.8 billion on Dec. 31, 2000.

“While a portion of the increase is due to appreciation of the fund’s holdings, Low-Priced Stock also has experienced very heavy investor inflows, and its cash position rose to 19% by the end of March,” said Abigail Johnson, chief of Fidelity’s money-management arm. The fund focuses on stocks selling below $35 a share.

Manager David Herro, whose Oakmark International Small Cap had $324 million in assets as of March 31, offered a similar explanation: “Limiting asset growth allows us to remain true to the fund’s mandate--to invest in small-cap companies based outside of the U.S.--and to maintain investment flexibility.”

For existing shareholders, such closures can be beneficial.

“Most of the fund industry has learned the hard way that it’s better to close a fund earlier rather than later,” Kinnel said.

Putnam Funds, American Century Investments and AIM Capital Management are among the families that have been quicker to close their funds in the last two years, he said. Over the years asset bloat has led many small-cap funds to sluggish returns or forced a change in their investment style.

For investors with a long-term horizon, a fund’s reopening is probably a better time to buy than when it closes, Kinnel said.

“If you’ve been in the market for a while and you’ve only just discovered small-cap stocks, you may be coming late to the party,” he said.

Regardless, investors have plenty of standout small-cap funds to pick from, Kinnel said.

Of the 517 small-cap funds rated four or five stars by Morningstar, or above average based on performance in recent years, 452 are open to new investors. Among small-cap funds favored by Morningstar analysts: Royce Total Return, Third Avenue Value, William Blair Small Cap Growth and RS Diversified Growth.

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Off-Limits to New Investors

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