Knowing when to unload a fund is tricky. In fact, choosing a
fund to buy is probably an easier process. But just as you should
have a checklist for buying, a checklist for selling can help, too.
Here are five factors to consider.
A key manager leaves. If a manager has been integral to a fund's
success, his or her departure may be a sign that it's time to walk
away. Such was the advice we gave when the manager of T. Rowe Price
Health Sciences left last year. And we're keeping a watchful eye on
another Price fund, Small-Cap Value; its longtime manager, Preston
Athey, is retiring at the end of June.
The fund grows too large. Size matters. Smaller is better,
especially with funds that focus on small or midsize companies.
Otherwise, when such funds with too much money make big trades,
they risk moving share prices--up when buying, down when
selling--in ways that can hurt results. But asset bloat can also
trip up big-company funds, so last month we ousted Fidelity
Contrafund from the Kiplinger 25.
The fund consistently underperforms. This is a thorny issue: How
badly, and for how long, does a fund have to lag before it's time
to sell? One abysmal year may give you pause, unless, of course,
it's preceded by several solid years and the fund's investing
strategy hasn't changed. But consistently bad performance over
three or four consecutive years that drags down a fund's long-term
record is a red flag.
The environment changes. We don't advocate market timing, but
it's hard to ignore some big-picture issues. For instance, starting
in 1981, interest rates began a steady slide. Now, with rates more
likely to rise than fall, many bond funds are vulnerable (rates and
bond prices generally move in opposite directions). Funds that
invest in long-term bonds are especially at risk. It's a good time
to sell them.
The fund's strategy changes. A fund can shift its focus in ways
that clash with your goals. Fairholme Fund, once more diversified,
now looks a lot like a financial-sector fund. Look at the holdings
in your fund to make sure it fits with your goals and your
portfolio. If it doesn't, consider selling.
Here are some examples of how we've put these principles into
action. If you hold any of these six funds, consider selling.
Fidelity Low-Priced Stock (symbol
). With $48 billion in assets, Low-Priced is more than 30 times
bigger than the average midsize-company fund.
Harbor International (
). The fund has lagged its benchmark since the death of longtime
manager Hakan Castegren in October 2010.
Janus Triton (
), Janus Venture (
). Managers Chad Meade and Brian Schaub left these two
small-company funds in 2013, after seven years of generally good
returns. Royce Low-Priced Stock (
). Over the past three years through April 4, the fund trailed the
typical small-company stock fund by an average of 13.1 percentage
points per year. Ouch!
Third Avenue Value (
). What was once a fund that focused on small U.S. companies is now
a global fund, with 41% of its assets invested in Asia.