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The Trouble with Tapering

Morningstar Articles

Tue, 18 Jun 2013

A little while ago I looked at the hottest-selling funds of 2006 . Now I'm going to look at the funds that have suffered the largest net redemptions so far this year, based on our calculations. It's an intriguing list, with a number of surprises. Some look more like buys than sells to me, but I'm a contrarian. Below are my comments about the funds that are seeing the most money head out the door. For a complete list of the 20 funds with the greatest net redemptions in 2006, see the table near the end.   Fidelity Magellan  FMAGX Net Outflows: $6.3 billion It's easy to see why investors are redeeming their shares in this fund. Its huge asset base and poor stock selection have caused it to beat the index in only two of the past six years. Moreover, Harry Lange's early lead versus the index this year turned quickly into a deficit when the markets pounded tech and Japanese stocks in the second quarter. For the year to date, the fund is up just 0.8%, while the S&P has returned 5%. On the plus side, Lange's tenure here has been too brief to draw any conclusions, and the fund's outflows have the fund down to a more manageable $44 billion. So, I'm more bullish on this fund than I have been in a while, but I still wouldn't buy.   American Century Ultra  TWCUX Net Outflows: $3.9 billion It's no accident that many of the funds on this list are large blend or large growth. A small-value fund that has underperformed lately might still be up 9% annualized over the past five years. Large-growth underperformers, by contrast, are apt to be in the red. This fund has made the mistake of getting aggressive in a market that has largely punished aggressive moves. Big bets on Internet-related stocks like Amazon AMZN, eBay EBAY, and Yahoo YHOO have been murder on this fund, as it is having its second bad year in a row. A large-cap growth rally could make this fund a star again, but waiting is tough.   American Funds Washington Mutual  AWSHX Net Outflows: $3.7 billion Since American is the hottest-selling fund group out there, you might think all of its funds would have inflows. However, this fund is well behind most large-value funds over the trailing three- and five-year periods, so the redemptions are only a little surprising. Yet its returns are better than that comparison would suggest. First off, this fund's dividend mandate shrinks its universe down to mostly large caps with sizable dividends. Because small- and mid-cap stocks have whipped large caps lately, this offering's focus on dividend-paying blue chips has been a big disadvantage even relative to other large-value funds. Moreover, you buy this fund for defense, not offense. During the worst of the bear market, this fund held up much better than its peers.   Vanguard 500 Index  VFINX Net Outflows: $3.4 billion Here's proof that even the best of funds can suffer redemptions when they are out of style. Mega-caps have had poor returns, so more people are fleeing this fund. It also reflects the fact that Vanguard investors are increasingly choosing   Vanguard Total Stock Market Index  VTSMX over this one. The Total Stock Market fund doesn't suffer from the S&P 500 Index's quirks, such as adding stocks in big chunks while excluding others. I'm sure the fact that Total Stock Market has outperformed Vanguard 500 hasn't hurt, either.   Fidelity Low-Priced Stock  FLPSX Net Outflows: $2.4 billion Are investors growing impatient with Joel Tillinghast after all the great years of returns he's made for them? I doubt it. This fund is still performing respectably. The reason it is experiencing outflows is that Fidelity has almost completely turned off the spigot. People who are new to a 401(k) can't get in anymore. Likewise, when a company changes plan providers it's unlikely that they can keep this fund in their 401(k). So, as this fund falls out of more and more 401(k) plans, it's understandable that it would see net redemptions. Given how big the fund is, those withdrawals should be a welcome development for investors still in the fund.   Templeton Foreign  TEMFX  Net Outflows: $2.3 billion It's a little surprising to see any foreign fund on this list because they've been on a tear of late. However, this particular one is working on the fourth year of a brutal slump. The fund's five-year returns are in the foreign large-value category's bottom 15%.   Fidelity Growth & Income  FGRIX  Net Outflows: $2.2 billion There are a lot of similarities here to what's happening at Magellan. In both cases, a manager with a great track record at another fund took over a new fund on Oct. 31, 2005, and has been unable to turn around performance so far. On the plus side, Tim Cohen is down to around $29 billion in assets at this fund, and that's a more manageable sum than the amount Lange is running at Magellan.   AIM Constellation  CSTGX  Net Outflows: $2.1 billion AIM Constellation has actually produced decent returns in recent years. Most likely the redemptions have been the reaction of former shareholders of two other funds that were merged into this one. AIM Weingarten and AIM Aggressive Growth merged into this fund in March, nearly doubling assets. However, AIM Aggressive Growth was a small- and mid-cap offering, whereas this is a large-growth fund. Thus, I'd imagine that some investors sold this fund in order to buy another that focused on small- and mid-cap names.   Fidelity Blue Chip Growth  FBGRX  Net Outflows: $1.9 billion This fund has been more unimpressive than awful. It's working on its fourth straight year of third-quartile performance. In the low-return large-growth category, that spells redemptions. At some point mega-cap growth will come back, and this fund's fortunes will take a turn for the better.    Largest Net Redemptions in 2006 Category YTD Outflows ($ Bil) Fidelity Magellan FMAGX Large Blend 6.3 American Century Ultra Inv TWCUX Large Growth 3.9 American Funds Washington Mutual AWSHX Large Value 3.7 Vanguard 500 Index VFINX Large Blend 3.4 Fidelity Low-Priced Stock FLPSX Mid-Cap Blend 2.4 Templeton Foreign TEMFX  Foreign Large Value 2.3 Fidelity Growth & Income FGRIX Large Blend 2.2 AIM Constellation CSTGX Large Growth 2.1 Fidelity Blue Chip Growth FBGRX Large Growth 1.9 Fidelity FFIDX Large Blend 1.8 American Funds Invstmt Co of Amer AIVSX Large Value 1.7 Fidelity Puritan FPURX Moderate Alloc 1.6 PIMCO Low Duration PTLDX Short-Term Bond 1.5 Putnam Fund for Growth & Income PGRWX Large Value 1.5 Morgan Stanley Inst International Eq MSIQX Foreign Large Value 1.5 Fidelity Equity-Income FEQIX Large Value 1.5 Fidelity Dividend Growth FDGFX Large Blend 1.4 Putnam Voyager PVOYX Large Growth 1.4 Oppenheimer Capital Appreciation OPTFX Large Growth 1.3 Vanguard GNMA VFIIX Intermediate Govt 1.2 Data as of 7-31-06 Poll Results Last week I asked which manager change worried you the most. Here's how the vote went: 29% Fidelity New Millennium 27% Fidelity Small Cap Value 23% Clipper 20% Janus Mercury

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