From the NY Times this weekend...
This article along with the "Eyeing the Lifeboats" article in Barrons, and fund statements that showed up in mailboxes this week isn't going to do much for positive sentiment among long term and mutual fund holders...
A Time to Bail Out? Some Clues
By JOHN KIMELMAN
When is it time to sell a mutual fund? For Kevin Kuta, it was when his normally cast-iron stomach began to turn in knots.
In the fall of 1999, Mr. Kuta, the owner of a commercial glass-making company in Omaha, bought shares of Janus Mercury, a technology-heavy large-capitalization growth fund, and Firsthand e-Commerce, a new Internet fund. Both portfolios reached new highs within months, then began long, painful declines.
After waiting for turnarounds that never came, Mr. Kuta, at the urging of his financial planner, began selling off shares of the funds in the summer of 2001, using the proceeds to reposition his portfolio more conservatively. Though no investor likes to sell while prices are falling, Mr. Kuta, 46, takes some consolation from those funds' continuing losses after he dumped them. "It was difficult for me to sell because I still thought they might go back up," he said. "But I decided it was important to reallocate a bit and move things into a more conservative strategy."
For Mr. Kuta, as for so many investors, deciding when to sell a fund is much harder than figuring out which funds to buy. But while mutual funds are often viewed as investments for the long term knowing when to sell a fund, and move into shares of other funds, can lead to better returns over all, just as it does in stock investing.
"Few investors have a sell discipline, especially do-it-yourself investors," says Roy Weitz, publisher of FundAlarm, a Web site with the unusual mission of helping investors determine which funds are worth selling. "But it's potentially easier than many investors think."
Fund analysts and certified financial planners suggest that there are at least five basic reasons to sell a fund, apart from the desire to generate quick cash. The first may be the most obvious: the fund isn't performing as well as its peers over the long term.
Second, an investor may want to part with a fund because of "style drift," the transformation of a fund's investment approach. In recent years, for example, many funds that started as small-cap and mid-cap stock funds became large-cap funds as billions of fresh investor dollars forced them to move beyond smaller-cap names. While many of these funds continue to perform relatively well, they may no longer play the role in a portfolio that was intended at purchase.
Third, an investor may want to sell if a fund manager who has delivered outsized returns decides to leave. It is worth holding onto the fund, several analysts said, if the investor has good reason to believe that others at the fund company have the expertise to carry on in the same tradition.
Fourth, a fund with a growing ratio of expenses to total assets might be a candidate for sale, particularly if that ratio is in the top quarter for its peer group.
Finally, it may make sense to sell shares as part of an overall decision to balance assets in a portfolio. "If an investor has done good due diligence up front and picked good funds, then selling a fund for asset allocation reasons is the primary reason why you would sell a fund," said Michael Karstens, an independent certified financial planner in Omaha, who advises Mr. Kuta.
With the guidance of Mr. Karstens, Mr. Kuta decided to sell two fairly volatile stock funds to lower his overall risk. But many investors may want to change funds simply to keep a longtime commitment to specific percentage breakdowns of stocks, bonds and cash in their portfolios.
John Battista, a financial planner at Merrill Lynch in Media, Pa., said he believes that investors should create a mix of fund shares in keeping to an asset allocation target. A 50-year-old investor with a family, he said, might have 60 percent in equity funds, 39 percent in bonds and 1 percent in cash. One third of the equity portion, or 20 percent of the total investable assets, could be in large-cap growth stocks, another 20 percent in large-cap value stocks like banks and other financial services companies, 10 percent in small-cap growth and value and 10 percent in international funds.
"If you had rebalanced in the late 1990's when those large-cap growth funds went up, you would have kept more of the gains of the 1990's in your portfolio," Mr. Battista said.
The most common reason for a sale, though, is probably poor performance. But Russel Kinnel, the director of fund analysis at Morningstar Inc., said that isn't always a good reason. "Even good funds underperform their peers over some period of time," he said.
But when underperformance lasts five years or more, he acknowledged, an investor has to begin wondering whether to stay in the fund.
Mr. Karstens said, "If a fund ranks in the bottom 50 percent of its peers over a five-year period, that bothers me."
Consider two Putnam aggressive-growth funds, OTC Emerging Growth and Voyager II, two funds that still have plenty of assets under management. OTC Emerging Growth has relied on small-cap and mid-cap technology stocks with growth projections that often haven't panned out. The fund lost 51 percent in 2000, compared with 21 percent for its peer group, and then lost 46 percent in 2001, compared with a loss of 5 percent for its group, according to Morningstar. This year through Thursday, the fund is down 39.2 percent, versus a loss of 32.5 percent for its peers.
Over the last five years, the fund's annualized loss of 18.8 percent puts it in the 97th percentile in the mid-cap growth category, according to Morningstar. Over three years, the fund has had an annualized loss of 35.9 percent, making it one of the worst mid-cap growth funds for that period.
Unlike Putnam Voyager, its better-known and better-performing cousin, Voyager II is among the more troubled long-term bets. The fund, which like OTC Emerging Growth focuses on small stocks that promise high growth, has a five-year annualized loss of 7.9 percent, putting in the bottom fifth of its peer group, according to Morningstar.
Gordon Forrester, director of marketing for the retail fund group at Putnam Investments, conceded that the two funds had lagged behind their peers because of their unusually aggressive nature. But new management at both funds, he said, has taken steps in recent months to reduce these sector bets. As a result, he said, both funds are performing better this year, relative to their peers, though neither has broken into the top half of its Morningstar peer group.
Stlye drift can be another, though less apparent problem in a fund portfolio. Funds often start promising one style of investment, then shift to another. During the late 1990's, for example, Ivy International had a reputation for trolling the world for deep-value stocks, Mr. Kinnel said. But after a change in management in 2000, the fund took on more growth-oriented stocks, just as growth stocks generally began to decline. Moira McLachlan, the fund's portfolio manager, did not respond to requests for comment.
Registered users of the Morningstar site can sign up for free e-mail warnings when selected funds change their styles substantially. Mr. Kinnel also suggests that investors, on their own, track a fund's average market cap, average price-to-earnings valuations and industry sector weightings, to check on possible changes in a fund's style.
"If any of these change significantly, it could mean style drift," he said.
nytimes.com |
