Vanguard Cools Hot Fund

Stock quotes in this article: VCVLX , WFC , QCOM , DAL , AAPL , BAC , UNG , DBC  

NEW YORK (TheStreet) -- Vanguard has closed its Capital Value Fund(VCVLX) to new investors, after top holdings like Wells Fargo(WFC) and Qualcomm(QCOM) put the fund at risk for overheating.

The move to close the fund to new investors is in part to shield existing investors, Vanguard notes. The influx of more than $740 million into the fund this year could drive performance-chasing investors to trade in and out of the fund, hiking transactional fees for all. The fund has risen more than 76% year to date and tripled in size.

Vanguard's action could be judged as a bullish indication for mutual fund investors. After the market recovered from Internet-bubble lows in 2003, many popular mutual funds were closed to new investors. The downturn in 2008 once again spurred a reopening of funds. The fact that Vanguard can afford to be selective is a good sign that flows are on the upswing.

In addition to WFC and QCOM, VCVLX's top five holdings include Delta Air Lines(DAL), Apple(AAPL) and Bank of America(BAC). The fund, which seeks long-term return through investment in "undervalued" securities, has approximately 38% of its portfolio allocated to its top 10 holdings.

Rapidly rising mutual funds often attract performance-tracking onlookers. In an interview with The Wall Street Journal, Vanguard Chief Executive Bill McNabb noted that "despite our efforts -- at both a company and an industry level -- to educate investors about the perils of performance-chasing, we continue to be concerned about this behavior."

By closing the fund to new shareholder accounts, Vanguard will provide a "cooling-off" period for VCVLX. Existing investors will continue to be allowed to invest in the fund. This cap will prevent new investors from churning over shares of VCVLX in the short term.

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