02/2020 KIPLINGER’S PERSONAL FINANCE 61IST
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WHEN PEOPLE SAY “BREAKING UP IS HARD
to do,” they’re not talking about how
difficult it is to say goodbye to a poorly
performing investment. But knowing
when to sell a fund that’s gone astray
is tricky, too. We’re not talking about
index funds; you either want exposure
to a particular slice of the market or
you don’t, or you’ve found a cheaper
option. But an actively managed fund
poses a different set of questions.
We’ve highlighted four traits that
signal it may be time to sell. Any one
of them might not be a sufficient cause
to call it quits, but if a fund you hold
has two or more of these qualities, you
probably have reason to dump it.Returns are disappointing. Poor per-
formance shouldn’t be an automatic
trigger to boot a fund from your port-
folio. Consider first why the fund is
lagging. Is the slump tied to the man-
ager’s bad investment choices? Or is
the lull a periodic time-out because
the fund’s investment style is out of
favor? For example, funds with a focus
on discount-priced stocks have lagged
in recent years compared with funds
that invest in fast-growing firms. But
that isn’t always the case.
However, if a fund consistently
struggles to keep up with its peers
on a year-to-year basis, it’s time to look
for alternatives, says Todd Rosenbluth,
head of exchange-traded funds and
mutual fund research at CFRA. Keep
the manager’s tenure at the fund in
mind. If he or she has been at the helm
for only five years, it makes little sense
to scrutinize the fund’s 10-year record.
Give a manager some leeway; even
the best ones stumble for a time. But if
short-term sluggishness starts to dragdown a fund’s long-term returns,
it’s time to cut and run. That’s a sign
of sustained underperformance. Lew
Altfest of Altfest Personal Wealth
Management in New York, says he
starts to get “very concerned” after
a fund lags for two consecutive years.
And if underperformance continues
through a third year, “there’s a good
chance we’ll be getting out,” he says.A manager leaves. When a key manager
quits or retires, it’s a “red f lag,” says
Rosenbluth, because the new honcho
may shift strategies or sell chunks
of the portfolio. At the very least, be
prepared for a period of growing pains
when a new manager arrives. Chal-
lenges can come in the form of lack-
luster returns or big capital-gains
distributions as the new manager re-
shapes the portfolio. In mid 2018, after
Harbor International lagged its bench-
mark five consecutive calendar years,
a new manager took over. That Decem-
ber, shareholders received a whopping
capital-gains distribution that was
equivalent to roughly 38% of the
fund’s net asset value at the time.Assets explode. The bigger a fund gets,
the less nimble it can be and that can
hurt returns. Small-company stock
funds and concentrated funds, which
tend to hold fewer than 30 stocks, can
be particularly sensitive to asset bloat.
The third-biggest small-company
stock fund in the country, Vanguard
Explorer, has $16 billion in assets. It
has lagged its benchmark, the Russell
2500 Growth index of growing small-
to-midsize companies, in seven of the
past 10 calendar years, and it trailed
the index over the first 11 months of
2019, too. But large-company funds
have fallen victim to asset bloat, too.
The legendary Fidelity Magellan is
a classic example. As assets topped
$100 billion in 2000, the fund’s perfor-
mance relative to Standard & Poor’s
500-stock index deteriorated.The fund’s job changes. David Mendels,
an adviser with Creative Financial
Concepts, says he views fund analysis
as a job-performance evaluation. “I’m
hiring a manager to do a job,” he says—
to invest in small-company stocks, say,
or real estate investment trusts.
But funds can change over time.
Fidelity Low-Priced Stock, once a U.S.
stock fund, currently has more than a
third of its assets invested in foreign
stocks. It’s a solid performer and may
be worth keeping. But a big shift in
holdings should be a wake-up call
to rethink how a fund fits into your
overall portfolio and whether you
need to make any adjustments. “That’s
where I’d say, ‘You’re no longer doing
what I hired you to do,’ ” says Mendels.
“You’re outta here.” ■When to Sell a Mutual Fund
PRACTICAL PORTFOLIO Nellie S. HuangBuy-and-hold is a great investing approach, but sometimes you just gotta let go.
CONTACT THE AUTHOR AT NELLIE [email protected]