Closing funds teach you lessons about investments in the future

Fidelity Investments recently closed three funds to new investors, as the firm reportedly mulls merging or liquidating them into oblivion.

It’s not big news; thousands of funds are killed off across the industry every year.

Closings, however, affect millions of investors and for anyone who would prefer to stay out of that group — which typically suffers from poor results, high hassle factors and potential tax consequences — there is something to be gleaned from Fidelity’s actions.

The first inkling comes from simply seeing the names and objectives of the funds involved: Fidelity Tax-Managed Stock, Fidelity 130/30 Large Cap and Fidelity Fifty.

It might not be so obvious at a small company with a lesser name, but any time you see a big firm like Fidelity, Vanguard, T. Rowe Price and others making changes to their lineups, it is almost always fringe issues taking it on the neck.

It’s not that you won’t find a plain-vanilla growth fund on the chopping block, but that’s much more common at smaller firms or with troubled firms that are shuffling their lineup, such as Columbia having merged away more than 50 funds in a restructuring.

Mergers and liquidations aren’t horrific events for shareholders — in some cases, it rouses investors from ongoing inertia — but typically mean that an investor fell for a sales pitch and wound up with a lousy fund that failed to attract investor interest and hold management’s attention.

If you consider that potential any time you consider a new fund — especially one based on the latest issues and strategies — it will force you to consider if the new issue can attract other investors and has a strategy that actually works.

For proof, consider the three Fidelity funds.

The 130/30 fund was one of Fidelity’s attempts to join an industry trend after the financial crisis of 2008 that has resulted in almost universal mediocrity, using leverage and short positions — where managers are betting against stocks — to create a fund that purportedly will make money in all market conditions.

The problem is that the large- cap fund — positioned in what is recognized as the easiest place to have been making money over the last few years — had lousy performance (bottom 10 percent of its peer group over the last three years) and never found enough investors to attract enough dough to keep Fido interested. The fund has less than $20 million in assets.

Fidelity Tax-Managed Stock, likewise, has a size problem and performance issues, while Fidelity Fifty, with its concentrated portfolio, didn’t play to Fidelity’s strength.

For the investment firm, focusing on fewer picks limits what the firm does best.

The moral: If you plan on using a fund as part of your portfolio for years, make sure you’re buying something that will still seem like a smart idea years from now, rather than the market’s current flavor-of-the-day.