Interesting and sometimes useful information is contained in the buying and selling patterns of fund investors. My colleague Russ Kinnel will list funds that have been selling like hotcakes in a column coming up on Monday, but today I'll focus on some big ones that have been shrinking quickly due to investor redemptions.
When money comes and goes from a fund, its manager must buy or sell securities to accommodate the activity. Flows in either direction that are big and fast can force a manager's hand in ways that are detrimental to shareholders. For example, in the late 1990s, Janus funds took in money far faster than its research effort could ably put it to work. As a result, most Janus funds ended up owning the same stocks in just a couple of sectors, which turned disastrous when the tech bubble burst and shot holes through the firm's research. We've seen outflows turn into a destructive force, too, when trading volume for a fund's holdings dries up. In some such cases, selling can actually lead to worse losses, because the fund's traders have to offer fire-sale prices in order to find a buyer. This phenomenon took down Schwab YieldPlus SWYPX and Fidelity Ultra-Short Bond FUSFX in 2008.
Flows aren't necessarily an indicator of what you should be doing, however. In fact, investors are notorious for buying high and selling low, which sometimes turn flows into a useful contra-indicator.
Morningstar estimates flows by collecting a fund's asset level at the beginning and end of each month and then backing out its performance to arrive at an estimate of how much money moved in or out during the period. We took a look at the flows for the first six months of 2009 and have highlighted five notable funds that have seen a sizeable percentage of their total net assets walk out the door.
American Funds Capital Income Builder (CAIBX)
YTD Estimated Flow: -$4.5 billion
Net Assets as of June 30, 2009: $71.2 billion
For years, American Funds has attracted sizeable sums of new money to its funds. The tables have turned recently, however, and the firm's offerings have faced big outflows. This one tops the list for the first half of 2009. Investors were accustomed to good downside protection from this income-focused balanced fund, but it didn't escape last year's crisis and posted a 30% loss. We think investors are making a mistake giving up on this fund, though. Capital Income Builder is one of our Fund Analyst Picks and we have a high degree of confidence in its ability to provide attractive risk-adjusted returns for investors over time. The fund owns stocks, bonds, and cash and puts a high priority on income, aiming to grow its dividend over time. It has a great long-term record, and we don't think that its managers have lost their touch. The portfolio is fundamentally sound. It's loaded with firms that have predictable cash flows and dominant market shares.
Western Asset Core Plus Bond (WACPX)
YTD Estimated Flow: -$2 billion
Net Assets as of June 30, 2009: $ 7.7 billion
Investor's confidence, and our own, was shaken in 2007 and 2008 when this fund tripped up holding nongovernment mortgages and shaky corporate bonds such as those issued by Lehman Brothers and GMAC. We worried about management's ability to handle the risks that come with its approach and removed the fund from our Analyst Picks list. Investors seemed to share our concern because a large portion of the fund's asset base flocked for the exits. We've seen Western Asset take important steps to improve its research and risk-management processes, giving us renewed confidence in the fund's ability to get back on track. The fund's year-to-date return is in the top decile of its intermediate-term bond peers and despite going through a tough period, it still boasts a strong 10-year record.
Davis New York Venture (NYVTX)
YTD Estimated Flow: -$1.5 billion
Net Assets as of June 30, 2009: $28.3 billion
Financial companies have been in this fund's sweet spot for years, so it isn't a huge surprise that it suffered last year driving some of its shareholders to hit the road. Yet, given the fund's heavy stake in financial companies, the fact that it trailed the S&P 500 by only 3 percentage points in 2008 doesn't seem so bad. The fund had some blunders, such as owning AIG (AIG), but Chris Davis and comanager Ken Feinberg are proven stock-pickers who have achieved good results over long periods. We think they are capable of learning from errors without compromising their philosophy and process.
PIMCO Developing Local Markets (PLMIX)
YTD Estimated Flow: -$1.3 billion
Net Assets as of June 30, 2009: $1.5 billion
This fund's asset base has shrunk to $1.5 billion from more than $6 billion in June 2008. The sour market for emerging-markets bonds and currencies brought down assets as did large-scale redemptions. We like manager Michael Gomez, who recently added to his responsibilities by taking over PIMCO's European emerging-markets efforts, and we have confidence in the underlying emerging-markets bond team at the firm's west coast headquarters. We think PIMCO's strong grasp of factors driving the global economy give this fund a leg up navigating local-currency bonds in developing countries, though the fund's volatile nature and recent outflows show that it is not appropriate for investors who can't handle the bumps.
Fidelity Magellan (FMAGX)
YTD Estimated Flow: -$1.3 billion
Net Assets as of June 30, 2009: $21.7 billion
This former giant is only a shadow of its former self. Years of middling returns and an indexlike exposure under Bob Stansky started the fund's slow bleeding of assets, and current manager Harry Lange's wild ride has kept the net outflows going even in the second quarter despite the fund's strong performance this year. Lange isn't chasing after steady-Eddies. He prefers firms with faster, if more erratic, earnings growth, leading the portfolio to racier areas of the market, especially technology. Lange's bias makes the fund vulnerable to steep losses in downturns, as illustrated in 2008, but as his success thus far in 2009 illustrates, it can be highly rewarding in up markets.
Karen Dolan, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.