Bet on the jockey, not the horse.
Deciding whether to buy or keep a fund that was once a top performer can be tricky. Besides all the normal factors to consider, you may have to sort through some emotional baggage. If the fund made you money in the past, you may be biased toward it even though it may be under new management and look much different from it once did.
In the best cases, star funds remain stars--if not forever, at least for decades. Among funds in that small category are American Funds Growth Fund of America
But many other onetime luminaries have sagged, lagged, or gagged because their management or strategies changed.
The Cooking Test
Before I'll consider buying into a blast from the past, a fund must pass two tests. First, the current manager must hold a significant stake in his or her fund. If a manager doesn't have the conviction to invest at least $1 million in his fund, I'm not buying.
Managers' reluctance to eat their own cooking disqualifies some high-profile funds. Neither of American Century Ultra
The second test is that current managers must have outperformed their benchmark--not necessarily by a huge amount--since taking over the fund. Running a big, prominent fund is a challenge, and I want to know that the manager can succeed in making the jump from managing, say, $1 billion to running $10 billion. Ultra and Magellan fail this test, too.
Fidelity Dividend Growth
The fund languished under the previous manager, Charles Mangum, who favored stocks of huge companies. Rakers, by contrast, invests in companies of all sizes. In 2009, his first full year as manager of Dividend Growth, the fund sizzled, gaining 51%. Despite this and Rakers' fine long-term record, investors are not rushing to pour money into Dividend Growth. That's one perk of buying fallen angels that have been scrubbed off investors' lists. They're unlikely to drown in a flood of new cash anytime soon.