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Outflows Besiege Four Funds

Mutual fund analyst Greg Carlson took a look at several small- and mid-cap funds that have seen big outflows recently.

Morningstar Advisor, 06/12/2012

This article originally appeared in the June/July 2012 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000. 

When investors begin to depart a fund in droves, whether because of a manager change, poor performance, or both, it can make an already difficult situation worse.
  

This is particularly true at small- and mid-cap funds. They tend to have smaller asset bases than do large-cap funds, which means that, on average, less cash is free to meet redemptions. That means stocks must be sold, and such funds typically hold names that are less liquid than large caps. Thus, the manager may have difficulty unloading them to meet redemptions without driving the stocks’ prices down significantly before doing so. Mutual fund analyst Greg Carlson took a look at several small- and mid-cap funds that have seen big outflows recently.

Royce Value Plus RVPHX
This once-hot fund has had a rough go of it since its asset base expanded along with its list of holdings and Chip Skinner became the lead manager in 2007. The fund posted top-decile showings in the small-growth category from 2002 to 2006, and investors piled in, with a combined $2.5 billion tossed into its coffers in 2006 and 2007. Now that the bloom is off the rose (the fund has lagged more than 80% of its peers over the past five years), the hot money is being shaken out. A sum of $1 billion has been pulled over the past 12 months, which represented 30% of the fund’s asset base one year ago. The fund didn’t own more than four days’ trading volume in any of its recent top 10 holdings. While that is a good sign, a fair amount of the fund is in micro-caps and small caps where forced sales could really sting.

T. Rowe Price Mid-Cap Growth RPMGX
Investors have yanked $2.3 billion from this closed fund over the past 12 months, and $2.7 billion since the start of 2011. True, this is the third-largest actively managed small- or mid-cap fund around at $19.3 billion in assets. But those redemption figures are still nothing to sneeze at. Furthermore, manager Brian Berghuis generally keeps less than 5% of assets on hand in cash. If redemptions accelerate, trimming positions significantly could prove cumbersome: The fund owns an average of eight days’ trading volume in each of its top 10 holdings. That said, the fund’s relative performance has been solid since the start of 2011 and outstanding over the long haul, so we’re not worried yet.

Fidelity Value FDVLX
This struggling fund has seen redemptions for four years straight now, and more than $2 billion has been pulled in the past year. That’s quite a hit for a fund that had $8.6 billion at the end of 2010. On the plus side, about 40% of the fund is in large caps. The outflows come just after the fund underwent a major restructuring in mid-2010, when longtime skipper Rich Fentin retired. Matt Friedman took over half the assets, and the other half came under the control of a group of sector specialists. It’s not clear whether outflows have affected performance yet: While the fund struggled on an absolute and relative basis in 2011, that showing isn’t surprising given the cyclical tilt of its holdings and investors’ flight to quality last year. Nevertheless, the hefty outflows provide another reason to be wary of this fund along with the unproven skippers at the helm.

American Funds SMALLCAP World SMCWX
A total of $2 billion was pulled from this world-stock fund over the past year. The fund posted strong returns in 2009 and 2010, in part because its focus on small- and mid-cap stocks gave it a big leg up on most of its category peers, which focus on large caps. It had $22 billion at the end of 2010 and often holds close to 10% of its assets in cash, so the $2 billion in redemptions likely hasn’t caused much trouble—particularly given the raft of portfolio managers working independently at the fund (13 total) and its broadly diversified portfolio of nearly 600 stocks.

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