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January's Mutual Fund Red Flags

Three funds whose performances have slowly slipped to mediocrity.

Morningstar Analysts, 01/17/2006

<P><EM>Get Mutual Fund Red Flags delivered to your e-mailbox every Tuesday. </EM><A href="http://advisor.morningstar.com/products/enews.asp" ><EM>Sign up for our free Investment Insights e-newsletter</EM></A><EM>.</EM></P> <P><EM>This article originally appeared in </EM><A href="http://corporate.morningstar.com/US/asp/subject.aspx?xmlfile=28.xml" target="_blank" >Morningstar FundInvestor</A><EM>, an award-winning newsletter that presents investment strategies and tracks 500 funds.</EM></P> <P>As often as not, popular, successful funds later become unattractive investments. But the vast majority of those riches-to-rags stories aren't marked by implosions; instead, they slide gradually into mediocrity, undetected by many of their less-vigilant shareholders because they avoid suffering a dramatic blowup. This month in Red Flags, we're highlighting three funds that have already slipped a long way down that path.</P> <P><STRONG>Putnam Fund for Growth & Income</STRONG> <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>PGRWX</MSTR:SECURITY></P> <P>This large-value fund's asset base peaked around $40 billion several years ago, thanks to above-average returns and an experienced team. However, the fund's fortunes have since declined: It is on pace for its seventh consecutive subpar annual showing. The fund hasn't had any disastrous years. Instead, a combination of poor stock-picking and a lack of distinctive bets versus its rivals and the Russell 1000 Value Index have resulted in a mediocre record.</P> <P>The fund has recently undergone a couple of strategy changes, and Putnam's chief investment officer, Joshua Brooks, has joined its existing three managers. While it's possible the fund may turn around, it's difficult to see that happening, since the three other skippers have been on board for at least five years' worth of weak performance. </P> <P><STRONG>Janus Fund</STRONG> <MSTR:SECURITY>JANSX</MSTR:SECURITY></P> <P>The flagship fund of this formerly red-hot growth shop didn't perform as badly during the bear market as some of its siblings did. However, manager Blaine Rollins, who took the helm in 2000, has had difficulty filling the shoes of predecessor Jim Craig, who compiled an enviable record during his 13-year tenure. At first Rollins, like Craig in his last two years at the helm, took sizable positions in his favorites, which were often high-priced names such as former media darling Time Warner <MSTR:SECURITY>TWX</MSTR:SECURITY>. However Rollins' picks flopped (aside from a 2003 rally), and the fund has lagged 70% of its large-growth rivals for the five years ended Dec. 31, 2005. What's more, its 10- and 15-year returns are now middling. Given that showing, it's no surprise that the fund, which once weighed in at nearly $50 billion, has seen its asset base dwindle to $11 billion.</P> <P>Rollins has backed off his biggest bets. The fund's four top holdings consumed 28% of assets in September 2004, but now its four largest positions amount to just half that. Rollins says he is devoting more cash to the picks of Janus' expanded analyst staff, but if his favorites do make a comeback, the fund is less likely to stand out. We think shareholders should seek greener pastures.</P> <P><STRONG>American Century Growth</STRONG> <MSTR:SECURITY>TWCGX</MSTR:SECURITY></P> <P>Blowout returns in 1989 and 1991 drew investors in--the fund's asset base grew to nearly $5 billion by the end of 1992--but the managers responsible for those gains are long gone. From January 1992 through late 1994, four of the fund's five veteran team members left, and another nine managers have since come and gone. The fund has since been a middling performer, but as large-growth funds posted big absolute returns in the late 1990s, investors poured money into the fund anyway; it hit the $10 billion mark at the market's peak.</P> <P>Current skippers Gregory Woodhams and Preston LeGard are experienced: They have worked on the fund for seven and five years, respectively. The duo seeks out firms with rising profits and revenues (which are key criteria for most of American Century's growth funds), and they trade at a fairly rapid pace, based largely on quarterly earnings reports. However, the managers' execution has been wanting; they missed the runup in energy stocks this year and were slow to capitalize on tech firms' profit rebound in 2003. We'd bail on the fund.</P>

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