How to figure out if your fund has turned the corner.
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What happens when a long underperforming fund shows signs of life? Is it proof that it's turned the corner and your patience is finally being rewarded, or are you being tricked into holding on only to suffer through a second bout of underperformance?
Figuring this out is one of the tougher challenges facing mutual fund investors. So, I'll look at four cases of big funds that are showing signs of life for the first time in years. Each fund produced top-third returns for the trailing 12 months, yet still has an ugly five-year performance record. Taken at face value, it's great to see these funds finally making up ground for shareholders, but it can also make it tougher for shareholders to cut the string.
The key in these cases is to take a close look at the fundamentals underlying the rebound to see if there really has been an improvement in areas such as management, expenses, or strategy. If you're not convinced, then it's probably time to move on.
American Century Giftrust
If this is a head-fake, it wouldn't be the first for this aggressive fund. After three straight bottom-decile performances from 1996 to 1998, the fund produced top quartile returns in 1999, only to spend four of the next five years in the bottom quartile. In 2005, it put up a truly impressive 22.05% return.
Also encouraging is that the performance came as a result of a change in management and strategy in 2004. New comanager David Rose tweaked the fund's momentum models and made them quicker to sell so as to get ahead of the crowd. Rose also had success in turning American Century Vista
First, momentum funds seem to have a harder time maintaining their success than do other funds. Second, this fund is tough to get out of once you're in. It takes a good amount of paperwork and there's not much point to sacrificing ease of sale when there are plenty of other good funds around. So, if you're already in and your child's college savings aren't all wrapped up in this one fund, it might be worth holding on, but otherwise don't bother. Rose also runs American Century Heritage