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Meet the 10 Most Redeemed Funds: Should You Stay or Go?

Why investors are fleeing these funds in droves.

Russell Kinnel, 11/27/2007

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

As you'd expect from someone who writes a column called The Contrarian, I like to go against the grain and invest where others are fleeing. That's why I find a list of the funds with the greatest redemptions intriguing. The catch, though, is that some funds are getting redeemed with good reason, so you have to pick your spots. In addition, redemptions can cause problems at a fund and make a bad situation worse by driving up trading costs and forcing managers to sell when they'd rather be buying.

Here's a look at the funds that have had the most dollars pulled out so far this year. The figures are through Oct. 31, 2007.

Vanguard 500 Index VFINX: Redemptions $14.4 billion, 12% of assets
This fund is as good as it's ever been, so I wouldn't join the pack fleeing the door. It's still a well-diversified low-cost index fund that closely tracks the S&P 500. Investors are bailing for two reasons. First, as a blue-chip-dominated index, this fund's returns lagged a lot of fund's from 2000-06 as small caps dominated. Second, Vanguard has recommended Vanguard Total Stock Market Index VTSMX over Vanguard 500 because the former has more holdings and doesn't often suffer from a big component jumping into the index.

Fidelity Growth & Income FGRIX: Redemptions $10.2 billion, 34% of assets
A third of assets have bailed on this fund, and it's easy to see why. The fund is working on its fifth straight year of lagging its peers and the S&P 500. Manager Timothy Cohen took over in 2005 after a strong run at Fidelity Export & Multinational FEXPX. This year has been harsh as Cohen's bets on banks and homebuilders have turned ugly with the mess in housing and mortgages. Wachovia WB, Countrywide Financial CFC, and Bank of America BAC have taken it on the chin. While this fund isn't a screaming buy, it is worth noting its positive qualities. It has low expenses, and Cohen's record at Export indicates that he may well turn this fund around.

Fidelity Magellan FMAGX: Redemptions $7 billion, 16% of assets
I wouldn't be surprised to see redemptions turn to inflows shortly at this closed fund. Harry Lange has hit it big with sizable growth-stock bets such as Nokia NOK, Google GOOG, Schlumberger SLB, and Monsanto MON. All told the fund is up about 17% on the year, putting it miles ahead of the S&P 500 and the average growth fund. Under previous manager Bob Stansky, Magellan missed a golden opportunity when growth rallied in 2003. But Lange has succeeded in making all he could out of 2007's growth rally. With assets down to a more manageable, but still big, $47 billion and an excellent manager at the helm, I think it's likely that those who bailed out this year will regret they did.

Templeton Foreign TEMFX: Redemptions $6 billion, 33% of assets
Like Fidelity Growth & Income, this fund's slump began in 2003. However, this fund is breaking out of its doldrums with a robust 15% gain on the year. That's a welcome change. On the downside, the fund just changed leaders. Jeff Everett left and was replaced by Tucker Scott, who had managed Templeton Foreign Smaller Companies FINEX. Scott had run similar institutional accounts and vows to run the fund in a similar strategy to Everett's.

American Century Ultra TWCUX: redemptions $5.9 billion, 41% of assets
Much like Templeton Foreign, this fund has had a manager change and a rebound. One big difference is that this fund's slump was much more brutal. Even with this year's rebound taken into account, this fund's trailing three- and five-year returns are still in the bottom quartile of large-growth funds--hence the redemptions. I take heart in the fact that American Century's new leadership has a good plan for reinvigorating the firm and has already produced some positive results at its besieged flagship. However, the rebound has as much to do with a momentum rebound as changes in personnel and strategy, so I wouldn't rush in just yet.

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