Investors shouldn't get their noses out of joint if mutual fund managers tell them to "get lost."

While some managers are turning away new business to their funds, that doesn't mean that the investor can't return at some future point - or even take a look at what other services the firm has to offer, according to The Wall Street Journal.

Turning away business may not make new clients happy, however, it does bode well for existing clients. Financial advisers feel that performance suffers when a fund becomes so large that managers have a problem carrying out their strategies. As portfolios grow, fund companies are motivated to keep taking on new business because of the financial incentive. Fees are calculated as a percentage of expanding assets.

"Closing funds is one of the better indicators that a fund company is putting fund investors' long-term interests ahead of its own short-term profit goals," said Russel Kinnel, director of fund research at Chicago-based Morningstar.

It is especially important with small-stock funds to say no to new business. Limited supplies of small company shares dictate how much a manager can invest in a single stock. If a fund opts not to close, managers most times buy more quantities of stocks or larger stocks, which will cause the fund's profile to change.

When is the best time to close? There are no strict guidelines dictating when it is best to close to new business. Factors to consider are: Do managers execute trades frequently and how much money is being run outside a certain mutual fund but still in a similar style?

Currently a number of high-profile funds have closed half their portfolios to new business. Among them are Dodge & Cox, Hotchkis & Wiley and Longleaf Partners. Reasons given for the closures range from funds nearing capacity to insufficient prospects for investing new cash.

Last year, two of the four funds at Dodge & Cox were shut off to new business. Ken Olivier, a spokesman for the firm, told WSJ, "We manage money for the benefit of our existing clients." There are no plans to reopen the funds at this time, he said.

Closing portfolios before they grow too large is one sure way to receive a stellar Morningstar rating. The research firm's stewardship rating mirrors the service a fund provides to its shareholders. The top 10 largest firms that have closed to new business have received an A or B score on an A-to-F scale.

Morningstar has taken some funds to task for not closing funds in a timely manner. Kinnel said that Fidelity's Magellan Fund, with assets of $53.9 billion, and Low-Priced Stock Fund, with assets of $37.3 billion, were prime examples of funds that should have closed sooner than they did.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.