4 Signs It's Time to Dump Your Mutual Fund

×

mutual fund performanceIt isn't easy to manage a $17 billion mutual fund these days. No one knows that better than Harry Lange, who was just booted from the helm at Fidelity Magellan (FMAGX), the iconic mutual fund that Peter Lynch put on the map.

The Harvard MBA's tenure had been disappointing since he took over the fund in late 2005. It has truly been a lost decade for the rock star fund that had roughly $100 billion in assets before the tech bubble burst. According to Morningstar, Fidelity Magellan has underperformed 96% of the funds in its large growth category over the past five years.

Investors probably should have seen this coming. But many didn't.

My Fund Did What?!

Many Magellan shareowners may not even realize how poorly the fund has been doing lately. After all, actively managed mutual funds are attractive to investors that don't want to keep up with the market's daily gyrations. However, ownership can't be an entirely passive experience.

Even if you only check your fund's Net Asset Value every once in a while, there are four signs to watch for that should find you evaluating if you still want to be an investor in that particular fund.

1. There's a new fund manager
If you were drawn to the Fidelity Magellan fund by Lynch's performance, or after reading his intuitive books, you're 21 years too late. Taking Lange's place is Jeffrey Feingold, who will become the fifth manager of Fidelity Magellan since Lynch left in 1990.

It doesn't matter that there once was an investing legend at the helm. Whenever there's a change at the top, you can't assume the investing philosophy that attracted you to the fund will remain intact. Every manager that has taken the reins has reshaped the fund's portfolio to match his unique style. A fund's category won't change, but the thinking on buy and sell decisions probably will.

There are two reasons -- except retirement -- behind any change at the helm. If the manager is doing too well, she may be whisked away by a rival firm or decide to strike out on her own. If the manager is doing poorly, we don't need to ask why the baton is being handed to someone else. In either case, investors need to reassess their reasons for ownership.

Feingold may very well do a better job than Lange. It will be hard to do worse. However, this is still a defining moment for the fund and its shareowners.

2. The asset base is getting too big
It gets hard for a large fund to be successful, since the bigger it gets the more limited it is in the stocks that it can buy or sell without moving the market. Lynch was smart enough to go out on top.

For those scoring at home, Fidelity Magellan at $100 billion in 2000 -- 10 years after Lynch's retirement -- was too big. Even the fund's net assets of $17 billion today may be too unwieldy to effectively manage. Lange probably would have done a much better job with a smaller fund.

It's true that a fund's growth is typically tied to its performance. A market-beating vehicle will attract a healthy inflow of new money. However, there's also a reason some funds close to new cash when they get to a certain size, especially funds that specialize in small- or mid-cap companies.

This rule obviously doesn't apply to index funds, where it's the same basket of stocks being bought and sold.

3. The asset base is getting too small
I hate to get all Goldilocks on you, but too small can be just as problematic as too big. A shrinking asset base indicates either that a fund is losing money or that more investors are selling than buying. Most likely, it's a combination of the two.

The problem with this situation is that a manager often has to sell fund holdings -- often at the most inopportune time and with taxable implications -- to cash out investors requesting redemptions. You don't want to be the one left holding the bag.

4. Your fund is being merged into another fund
There are many reasons why a fund family might combine two of its funds:

  • A small offering may not be as cost-effective to maintain as the fund operator initially expected.
  • Investor interest just isn't there for the fund being absorbed.
  • There's a merger between two fund families.

However, by far the sneakiest tactic -- and a common one, too -- is to bury a fund's poor performance by merging it with one that has amassed a better track record.

This can be a problem to investors in both funds. Even if there isn't a culture clash in management styles or if the acquired holdings aren't being sold right away, the transition can be rocky. Some investors in the fund being acquired will be tempted to cash out, especially if the new fund has a much different objective than the one that they originally bought into.

Know Your Funds

There are plenty of other fundamental reasons for investors to bail on a fund. Management fees may be too high. Its asset allocations or investing strategy may not be right for you or for current market conditions.

Underperformance for short stretches is fine. No manager is perfect. However, routinely losing out to its peers is unforgivable in a world of plentiful alternatives.

It's your money. Do Lynch proud and take an interest in how it's being managed.

Longtime Motley Fool contributor Rick Munarriz does not own shares in Fidelity Magellan.



Increase your money and finance knowledge from home

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

Investment Strategies

What's your investing game plan?

View Course »

Add a Comment

*0 / 3000 Character Maximum

9 Comments

Filter by:
Gail

Believe in this good news! Multiply your money investing in OIL. To answer you doubts get over yourself to my website “ Oil Trading Academy” and see what I have offer you. Know the Secret and BE RICH!

October 02 2011 at 10:30 PM Report abuse rate up rate down Reply
Iowa062286

SInce opening a 401K January 2010 I am up 17.1%. Don't know what people are crying about.

September 19 2011 at 6:46 PM Report abuse rate up rate down Reply
Iowa062286

Just start my 401K in January 2010 and I am up 17.1%. I am very pleased :)

September 19 2011 at 6:43 PM Report abuse rate up rate down Reply
rosecabinets

DUMP IT ALL!! Mutal funds, stocks, even savings has been stagnet for the last 10 years no matter what anyone
tells you. Anytime things look brighter, the US does something to screw it up. No matter how much I save it is not
moving in the right direction. Stuff your mattresses with gold or silver and you may stay ahead of the game!

September 19 2011 at 1:13 PM Report abuse +2 rate up rate down Reply
grovernorquist1

MY FELLOW REPUBLICANS,............IF I CATCH ANY OF YOU REPUBLICANS SIDING WITH OBAMA TO RAISE TAXES ON THE RICH I'LL WHIP YOUR ASS!!!!!!!!!............NOW GET DOWN ON THE FLOOR AND KISS MY FEET!!!!!!!!..........REMEMBER IM YOUR MESSIAH!!!!!!!!!!

September 19 2011 at 12:23 PM Report abuse rate up rate down Reply
bdzdean

The way things are going financially at the moment.

The stock brokers are making more money then the stock holders. Good news is that at least someone's making a few dollars.

September 19 2011 at 12:03 PM Report abuse rate up rate down Reply
dabrownman

5 signs it is time to dump your president

1, He spends a trillion dollars on jobs stimulus saying the unemployment rate will not go above 8% and it turns out all the money went from the taxpayers to the non tax payers that voted for the president and the unemployment rate went from 4.6% under the Republican congress to 9.8% under Obama and his socialist finally settling in to 9.2% three years into his failed presidency,

2. He claims he is the Messiah we have all been waiting 'or 'oh so long' becoming the first president that was self anointed.

2. Everything he does fails except for ObamaCare which is hated greatly by the vast majority of sane Americans who still pay taxes and it was deemed unconstitutional by sane judges.

4. Gives over 800 Billion tax payer dollars to his supporters that voted form hm but that wasn't enough he also gave GM to the Unions and kept it from going bankrupt even though they had no legal standing whatsoever.

5. He is a pathological liar

September 18 2011 at 8:56 PM Report abuse -1 rate up rate down Reply
2 replies to dabrownman's comment
hgeorgech

Bingo -- Right On!

September 19 2011 at 6:20 AM Report abuse rate up rate down Reply
Len Robertson

Let me explain the difference between Liberals and Conservatives.
According to recent studies, liberals live beneath their means, insist their children go to school, take responsibility for their actions and above all, they have a rock solid belief that tomorrow will be better than today. In addition, the 92% of America's three million millionaires that are self made are liberal in their views, especially in living beneath their means and in their rock solid belief that tomorrow will be better than today.

Conservatives, on the other hand, can't save a dime no matter how much they earn, laugh at education, blame everyone else for their many missteps in life and above all hate and fear the future. Many in fact pray every night for Armageddon so they don't have to live out their miserable lives.

Which are you: a winner or a loser?

September 19 2011 at 12:29 PM Report abuse -2 rate up rate down Reply
1 reply to Len Robertson's comment
tsgrcels

Your've got it exactly backwards. You must be a liberal.

September 19 2011 at 1:55 PM Report abuse +2 rate up rate down
Adele

Rep. Gohmert Introduces the American Jobs Act of 2011 ( two pages)Washington -

Rep. Louie Gohmert (TX-01) released the following statement today after introducing the “American Jobs Act of 2011” which will create jobs by taking the corporate tax rate to zero.

“We have heard a lot of rhetoric about job creation from President Obama over the last several days. After waiting to see what the President would actually put into legislative language, and then waiting to see if anybody would actually introduce the President’s bill in the House, today I took the initiative and introduced the 'American Jobs Act of 2011.' It is a very simple bill, which will eliminate the corporate tax which serves as a tariff that our American companies pay on goods they produce here in America.

Good for you Louie...... Good for you!
Now you can expect another big bribe from Exxon... just in time for Christmas.
Another big bribe will be coming to you around Valentines Day ......... big bucks from British Petroleum.
You are really a corrupt nasty person representing Texas... but we have a lot of yo ur knd here. Unfortunately!

September 18 2011 at 12:43 PM Report abuse +2 rate up rate down Reply
1 reply to Adele's comment
dabrownman

At least he is not a Marxist posing as a Socialist, liberal, progressive democrat like the lefty thieves in congress and the president.

September 18 2011 at 9:01 PM Report abuse -1 rate up rate down Reply