Spring Cleaning – Tossing Your Old Mutual Fund

I don’t like annual rite of cleaning out the garage, basement or closet  because I seem to find reasons to keep my old junk instead of getting rid of it and at the end of the day get absolutely nowhere.

The same can be said when reviewing investment statements. Investors look at their quarterly results and think that just maybe they should look for a replacement for one or two of their laggards and then inertia sets in and nothing is done. The reason is that not making or even losing money is not reason enough to sell something that an investor has owned for years and buy something they don’t know much about. The old mutual fund, even if it has mistreated them, is a known quantity much like a tight pair of shoes, and investors know what to expect. A new fund may look good on paper but once bought there’s no guarantee it doesn’t belly-up and die just like their old fund.

Almost all the disappointing funds in a portfolio are actively managed. That means that at the mutual fund company there is a group or individual who makes an effort to buy and sell stocks and bonds in an effort to make money for shareholders. How well those managers do is based on their plan, their computer programs, their knowledge and experience of the overall investment world. There doesn’t seem to be any concrete evidence that suggests some fund companies purposely lose money for clients. That doesn’t mean that losing money for a quarter, a year or even more doesn’t happen. It does and when it does an investor better be prepared to take his or her money elsewhere. Losing money is not the only reason for moving assets, here are a few more:

• The Mutual Fund Company decides to change portfolio managers. The manager may be fired, he may quit or retire. In any case a change is not usually a guarantee of better results. Give the new manager a year, no more, and then check his or her results with the overall averages.
• Change of Philosophy: Investors get a letter stating that their Large Cap Domestic Growth Fund is going to allow more foreign investments. If investor already owns world or foreign mutual funds this may mean an allocation that skews more in one direction than is comfortable. It may be time to look for that pure domestic fund.
• Performance lags that of similar funds over several years. This may be an indication that fund managers are in over their head, the fund has gotten too large or there is some internal problems investors don’t know about.
• Fund managers do not invest their own money in what they manage.
• Fees and expenses go up for some reason even as the mutual fund company has increased in size.
• Stealth. Investors notice the mutual fund getting more conservative or aggressive in what is known as style drift. There is no notice the mutual fund is changing its style but the manager(s) are buying investments not consistent with the stated investment philosophy.
• Too Large. Some fund companies rather than close mutual funds and return cash to investors simply roll assets from a poorly run fund into a successful fund in the mistaken belief that more money can only mean more success. This dumping ground may or may not work and give it a year before you make a decision to stay or move on.
• Risk and efficiency change from stated goals. Investors can check the Beta and Alpha of their fund against the indices and see deviations that may in fact be injurious.

Next week I’ll discuss how investor can go about rebuilding their portfolios.

Questions call Paul at 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.