Poor performance can indicate that stocks are on sale.
As a junior analyst covering Legg Mason Value
"Doubling down"--upping the ante on a bet--is a common tactic among value-minded mutual fund managers. If they've done their homework on a stock, these managers figure that lowering their funds' average purchase price of that name should be a no-brainer.
So, is doubling down a good idea when it comes to your mutual fund holdings, too? It's certainly not foolproof. A performance slump in a fund can be an indication of numerous "fundamental" ills, including personnel and strategy shifts, asset bloat, and upheaval at the fund-company level. And if the fund manager trades frequently or isn't particularly concerned about valuation, you won't get any sort of "pop" from buying the fund when it's in a trough because the slumping holdings may already be gone.
At other times, however, adding to funds on weakness can be an effective strategy. You can lower your own average cost basis in the fund, and you can give the manager money to put to work in the market when he or she is presumably finding a fair amount to buy. Contrarian fund buyers can also help the fund keep its overall trading costs down. If there's enough new cash coming in, the manager may be able to avoid selling stocks to meet redemptions, and he or she may also be able to obtain an advantageous price on new purchases because there are fewer buyers than sellers.
With some of our favorite funds slumping amid weakness in the financials and housing sectors, we decided to take a look at whether they represent a good buying opportunity. Here are a few that fit the bill. Not only do they have talented managers and good fundamentals, but their holdings look fairly cheap right now based on Morningstar's equity analysts' estimates of their holdings' fair values.
There are a few caveats, however: Some of these funds have indicated that they will likely make sizable capital gains payouts later this year, so check the Web sites for distribution information for these offerings (or for any other funds you're considering purchasing for your taxable account before year-end). Moreover, we're not promising that all of these funds will outperform their peers or the market in the very near term. Rather, we wanted to call attention to them because we think they're superior long-term holdings and it's better to buy them when they're in a trough than when they're riding high on the performance charts.
Legg Mason Value