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For those of us who want to approach the train wreck of our portfolio with some seasoned, rational thought, there are five basic reasons for changing from one mutual fund to another. First, a fund may have finally demonstrated beyond a shadow of a doubt that within its peer group, it is just not cutting it. In the basic fund style groups such as "growth" or "growth and income," there is surprisingly not a great deal of difference in performance over any longer period. The bulk of any performance numbers come from the style itself rather than any long-term stock-picking expertise. Managers of funds who beat their peers consistently often owe it to something as simple as lower annual fees or an opportune effort to let their style "drift." "Style drift," then, is a second reason to consider making some changes. Some funds maintain a given style for periods of time and then undergo a subtle switch. The most common, obviously, is the move from a small-company fund ("small-cap") to medium-cap. This happens when a fund is so gorged with money that it simply can't operate profitably in the world of smaller public companies. Yet, we want a portion of our money in the small cap fund type that historically has shown the first inclination to recover after a recession. We need to be one step ahead of any style drift within our collections of investments. Third, we need to be aware of any fund managers who may have left after contributing to the success of a fund. Again, in the larger fund groups, it is hard to imagine fund managers having much impact on the fund's success. Any visit to a major fund company will convince you of that when you see how young most of the managers are. At a Fidelity conference years ago, it felt like the succession of fund managers making presentations might have just moved out of their fraternities or sororities. If you have access to Sunday's New York Times, take a guess at the age of the manager of the T. Rowe Price International Bond Fund. I rest my case. I have nothing against young bright people, but the idea that anyone can manage money consistently well with limited experience is testing my gullibility. Fortunately, they can't do much damage because 70% of all results are a function of the entire market's performance. Another 10% or so is a function of how the style as a whole is doing. This leaves little variation for the manager to impact one way or the other. Fourth, a fund with high expenses relative to the rest of its peer group is asking for replacement. I have never seen an expensive fund whose performance over a long period could more than compensate for a high annual expense ratio. With the advantage of hindsight, it is always possible to find a fund with comparable performance and lower fees. The final acceptable reason for moving mutual fund money around is to rebalance the allocation of assets. Back in more normal years, re-balancing entailed the process of selling some winners to purchase some losers and thereby reestablishing our original percentage allocation. Today, it's an exercise in selling a fund that didn't go down all that much to buy some of a fund that really tanked. Talk about a counterintuitive step. However, the discipline of Modern Portfolio Theory calls for exactly this step. It helps to reduce risk and avoids what for most people is the mistake of retreating back into cash. And then there are the Janus Funds. This is a special case. In 1999, over one-third of all new money coming into the United States mutual fund industry went to the Janus Funds. They were growth funds, for the most part, and the Janus culture targeted companies that were candidates for increasing stock values. Jim Craig, a seasoned Janus Fund manager back in the '80's, happened to husband a hoard of cash approaching 35% of total assets. He then started buying stocks and Janus topped the list of growth funds for years to come. Years later, Jeff Vinik of the Fidelity Magellan Fund tried the same thing only to have it backfire with results that cost him his job. He missed the dramatic gains of the mid '90's. This just goes to show how market timing is nothing more than a gamble for even the best and the brightest. If you invested any mutual fund money back in 1999, there's at least a one-third chance that you had some Janus money somewhere, and something called "the status quo bias" probably means that you still have it. What now? I think some of the early success was attributable to the self-full-filling prophesy that a giant, successful fund can create as it continues to show interest in, and purchase, specific stocks. If you read James Cramer's book, "Confessions of a Street Addict," you can see how huge mutual funds manage to move markets to their advantage. Like a forest fire, they create their own updraft. Unfortunately, when markets turn down and these funds have to sell stock to meet redemptions, that same forest fire can singe the managers. Janus has had problems as an organization starting with a very unflattering article a few years ago in FORTUNE. Basically, it depicted an organization that may have been a victim of its excess-or at least the excess of its founders. The new CEO, Mark Whiston, has been with the firm for eleven years, but there is no evidence that he actually has run money as successfully as Jim Craig, his predecessor. Craig, who has been out of money management but who has been training and mentoring younger managers has recently left the firm. So, the jury is out on Janus at this point. The question for us is whether or not we who have invested there want to be part of what may be a noble experiment. After all, there are 9,500 other mutual funds out there. When we eventually look back on the first few years of the Millennium, we will see it for what it certainly is-a time that forced us to sharpen our investment intellect and improve our investment discipline. The nineties made all of us look like geniuses without even trying. Since then, it has been different. Most companies that survive tough conditions wind up stronger in the end. We need to appreciate this period for the valuable lessons it forces us to learn.
BUYandHOLD does
not offer or provide any investment advice or opinion regarding
the nature, potential, value, suitability or profitability of
any particular security, portfolio of securities, transaction
or investment strategy. Any investment decisions you make will
be based solely on your evaluation of your financial circumstances,
investment objectives, risk tolerance, and liquidity needs. The
securities mentioned above are being used for illustrative purposes
only and should not be regarded as an offer to sell or as a solicitation
of an offer to buy and past performance is no guarantee of future
results. The opinions expressed above are not necessarily those
of BUYandHOLD, its officers, directors or its affiliates. |
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