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Finding a Replacement for a Fund Closed to New Assets

Aug 8, 2014 Marc Odo

With markets hovering around all-time highs and money flowing in to equity mutual funds the possibility that hot-performing funds close their doors to new assets is a real concern.  Well-managed funds are honest with themselves and their shareholders about how much money they can effectively manage.  While typically not a concern in deep, liquid markets like large cap equities or Treasury bonds, capacity constraints do matter in less liquid markets like small caps and emerging markets.

So what to do if you discover one of your favorite managers announces they will no longer be accepting new money?  One option is to use Zephyr StyleADVISOR’s search feature to find other funds that have very similar returns.

Typically when one uses Zephyr StyleADVISOR’s search engine, one selects a passive market index and seeks out actively managed funds that have added value above and beyond the benchmark.  However, there is no rule that says one must use a passive market index as the benchmark. One could just as easily designate an active manager – in our case, the fund closing to new assets – as the reference point in a search.

Once selected, you can load up the universe of candidate funds in the same universe or category and run the standard set of statistics using the manager in question as the benchmark.  Certain statistics like tracking errorR-squared, and correlation will tell you just how closely all the other funds’ performance tracks the target fund’s returns and which might be a viable replacement.  You might even discover an under-the-radar manager that tracks your target fund closely but has even better performance.  Information ratio would likely be the best statistic to use to identify such managers.

If this process sounds a bit familiar to readers of ZephyrCOVE, it should.  The process is the same for our post on tax-loss harvesting posted in November 2013.  We’re taking the same idea and applying it to a different situation.

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