3 Signs That It May Be Time to Sell Your Mutual Fund «
Mutual funds are a great way to buy into the historical success of stocks and bonds without having to take the time to research investments one at a time. Mutual funds are cheap, especially if you stick to no-load funds that pack low expense ratios.
The luxury of investing in a mutual fund is that with someone else calling the shots, you are free to live your life. You don’t have to worry about the daily market gyrations. Buying into a fund should be a “set it and forget it” experience. However, there are a few events that should force you into reevaluating your investment. Let’s check them out.
1. Your fund manager is gone. Mutual fund ads claim that “past performance is no indication of future performance,” but if you’re buying a fund based on its track record, what you’re really doing is buying into the vision of the person managing the investments.
Fund managers can come and go. A hot fund’s manager will draw attention from rival mutual fund operators, and sometimes rock stars get pulled away to be at the helm of a new fund at the same family. If your fund managers change, you need to pay attention, especially if it was that shot caller’s picks that drew you to the fund in the first place.
It doesn’t always mean you bail. This doesn’t apply to index funds, naturally. Some multimanager funds hold up if some of the seasoned leadership sticks around. However, if an entirely new management team is in place, it’s only fair that you dismiss the fund’s past performance.
2. The fund gets too big. It’s probably not a surprise that top-rated fund managers sometimes struggle as their funds get too big. Legg Mason’s (LM) Bill Miller had a legendary run at Legg Mason Value Trust. He beat the stock market for 15 consecutive years through 2005. However, with fund assets topping $21 billion at its peak, it got harder to beat the market.
Miller made some bad bets on financials during the banking crisis, but it was probably hard to manage a fund so large. You have to buy in big chunks, and that often means either limiting oneself to the largest stocks or buying into so many different companies that it dilutes the performance of winners. It wasn’t a surprise to see Miller bounce back after he moved to the helm of a smaller fund at Legg Mason.
3. Your fund changes. Some mutual funds change over time, and it’s not often for the better. A fund family can often combine two funds into one, often when one is underperforming or too small. If your fund is the one being absorbed into another, you may find you’re invested in a fund with entirely different objectives than you had originally intended.
Mutual fund families can also acquire other families, and that could result in unflattering fee changes or fund combinations. The bottom line is that if the name of your fund changes, you should take the time to investigate what has actually happened.
It’s your fund. If it ever becomes something else — whether it’s through new management, new size, or new objectives — you may want to move on.