Occasionally, the management team and the Board of Directors of a T. Rowe Price mutual fund decide it is in the best interest of current shareholders to close a fund to new investors. Two primary factors may spur this decision:
- Strong recent performance or the popularity of the asset class can lead to large amounts of new cash being invested in the fund. The managers may be unable to deploy these cash flows effectively by finding attractive new investments. As a result, a large cash position in the fund can weigh on returns of both newcomers and existing shareholders.
- Mutual funds may become unable to perform their mission if they grow too large—this is particularly true of funds targeting smaller-capitalization stocks or a limited investment universe. Managers also may find it difficult to invest prudently in the types of securities that are the centerpiece of a fund.
With these considerations in mind, on April 27, 2012, at 4 p.m. ET, the High Yield Fund was closed to new investors. Existing shareholders in this mutual fund may continue to buy, exchange, and sell shares in accordance with our existing fund policies.
Although these funds employ a different investment strategy than the High Yield Fund, and therefore may be subject to different risks and reward potential, their portfolios include securities that offer the potential for high yield returns.
The T. Rowe Price Tax-Free High Yield Fund (PRFHX) seeks a high level of income exempt from federal income tax by investing primarily in long-term, low- to upper-medium-quality municipal securities. A substantial portion of the fund's assets is invested in below investment-grade ("junk") municipal bonds, and the fund may buy bonds in default as long as they do not exceed 10% of total assets.
The T. Rowe Price Floating Rate Fund (PRFRX) seeks a high level of current income by investing at least 80% of its net assets in bank loans and other floating rate debt securities. The fund may also invest up to 20% of its net assets in fixed rate debt securities, including high yield corporate bonds, often called "junk" bonds.
The T. Rowe Price Spectrum Income Fund (RPSIX) seeks a high level of current income with moderate share price fluctuation. The fund is invested in a diversified group of underlying T. Rowe Price domestic bond funds, foreign bond funds, a money market fund, and an income-oriented stock fund. Ten percent to 25% of the fund's assets may be allocated to the High Yield Fund. As of September 30, 2013, 18.8% of the fund's assets were invested in the T. Rowe Price High Yield Fund.
The T. Rowe Price Strategic Income Fund (PRSNX) seeks to provide investors with high income along with the potential for some capital appreciation. The fund uses an asset allocation strategy to build a broadly diversified portfolio of domestic and foreign debt instruments, including government and corporate bonds; mortgage-backed, commercial mortgage-backed, and asset-backed securities; and preferred stocks. Up to 65% of the fund's assets can be invested in below investment-grade (high yield) securities and up to 50% in non-U.S. dollar-denominated foreign securities, including those from emerging market countries. As of September 30, 2013, the Strategic Income Fund had 9.2% of its total net assets allocated to the high yield sector and 11.2% allocated to the bank debt sector.
Each of these funds has a different management team and uses a different investment strategy than the High Yield Fund. Percentages held in high yield securities will vary over time. All funds are subject to market risk, including loss of principal. The funds are also subject to interest rate risk and credit risk. In the case of the Spectrum Income Fund, the fund is subject to the underlying risks of the funds in which it invests.
A closing should have no direct impact on performance. Indeed, we close funds precisely to avoid the potential for large cash flows to begin to adversely affect performance for existing shareholders. At this time, we feel there has been no adverse impact on our ability to invest in specific securities; we are acting preemptively. In terms of historical experience, the performance of funds that grow larger and eventually close varies depending on different factors. T. Rowe Price is firmly committed to the interests of existing shareholders as opposed to the gathering of assets for its own sake.
Controlled growth in assets over time can be managed effectively, and we have been relatively successful to date in doing so. With our extensive in-house research capabilities, we envision no difficulty finding attractive investment opportunities within our investment universe for moderated cash inflows at this time.
The time is indefinite—there is no predetermined target date to reopen these funds. Closed T. Rowe Price funds will reopen when we believe that all incoming cash can be effectively invested without altering a fund's investment program.
At this time, we do not foresee the need to close any other funds.