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Fund Spy

Have You Hugged Your Struggling Fund Today?

Poor performance can indicate stocks are on sale.

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As a junior analyst covering  Legg Mason Value (LMVTX) more than a decade ago (!), I quizzed manager Bill Miller on his rationale for adding to his position in a company that had been badly beaten down. Miller's response was so common-sense and unequivocal that I can still recall it almost verbatim. "I almost always do that," he replied. "If I liked a suit at Nordstrom when it was full price, I should like it when it's on sale, right?"

"Doubling down"--upping the ante on a bet--is a common tactic among value-minded mutual fund managers. If they've done their homework on a stock, these managers figure that lowering their funds' average purchase price of that name should be a no-brainer.

So, is doubling down a good idea when it comes to your mutual fund holdings, too? It's certainly not foolproof. A performance slump in a fund can be an indication of numerous "fundamental" ills, including personnel and strategy shifts, asset bloat, and upheaval at the fund-company level. And if the fund manager trades frequently or isn't particularly concerned about valuation, you won't get any sort of "pop" from buying the fund when it's in a trough because the slumping holdings may already be gone.

Christine Benz has a position in the following securities mentioned above: OAKLX. Find out about Morningstar’s editorial policies.