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Meet the 10 Most Redeemed Funds: Should You Stay or Go?

Why investors are fleeing these funds in droves.

As you'd expect from someone who writes a column called The Contrarian, I like to go against the grain and invest where others are fleeing. That's why I find a list of the funds with the greatest redemptions intriguing. The catch, though, is that some funds are getting redeemed with good reason, so you have to pick your spots. In addition, redemptions can cause problems at a fund and make a bad situation worse by driving up trading costs and forcing managers to sell when they'd rather be buying.

Here's a look at the funds that have had the most dollars pulled out so far this year. The figures are through Oct. 31, 2007.

 Vanguard 500 Index (VFINX): Redemptions $14.4 billion, 12% of assets
This fund is as good as it's ever been, so I wouldn't join the pack fleeing the door. It's still a well-diversified low-cost index fund that closely tracks the S&P 500. Investors are bailing for two reasons. First, as a blue-chip-dominated index, this fund's returns lagged a lot of fund's from 2000-06 as small caps dominated. Second, Vanguard has recommended  Vanguard Total Stock Market Index (VTSMX) over Vanguard 500 because the former has more holdings and doesn't often suffer from a big component jumping into the index.

 Fidelity Growth & Income (FGRIX): Redemptions $10.2 billion, 34% of assets
A third of assets have bailed on this fund, and it's easy to see why. The fund is working on its fifth straight year of lagging its peers and the S&P 500. Manager Timothy Cohen took over in 2005 after a strong run at  Fidelity Export & Multinational . This year has been harsh as Cohen's bets on banks and homebuilders have turned ugly with the mess in housing and mortgages.  Wachovia ,  Countrywide Financial  , and  Bank of America (BAC) have taken it on the chin. While this fund isn't a screaming buy, it is worth noting its positive qualities. It has low expenses, and Cohen's record at Export indicates that he may well turn this fund around.

 Fidelity Magellan (FMAGX): Redemptions $7 billion, 16% of assets
I wouldn't be surprised to see redemptions turn to inflows shortly at this closed fund. Harry Lange has hit it big with sizable growth-stock bets such as  Nokia (NOK),  Google (GOOG),  Schlumberger (SLB), and  Monsanto . All told the fund is up about 17% on the year, putting it miles ahead of the S&P 500 and the average growth fund. Under previous manager Bob Stansky, Magellan missed a golden opportunity when growth rallied in 2003. But Lange has succeeded in making all he could out of 2007's growth rally. With assets down to a more manageable, but still big, $47 billion and an excellent manager at the helm, I think it's likely that those who bailed out this year will regret they did.

 Templeton Foreign (TEMFX): Redemptions $6 billion, 33% of assets
Like Fidelity Growth & Income, this fund's slump began in 2003. However, this fund is breaking out of its doldrums with a robust 15% gain on the year. That's a welcome change. On the downside, the fund just changed leaders. Jeff Everett left and was replaced by Tucker Scott, who had managed  Templeton Foreign Smaller Companies . Scott had run similar institutional accounts and vows to run the fund in a similar strategy to Everett's.

 American Century Ultra (TWCUX): redemptions $5.9 billion, 41% of assets
Much like Templeton Foreign, this fund has had a manager change and a rebound. One big difference is that this fund's slump was much more brutal. Even with this year's rebound taken into account, this fund's trailing three- and five-year returns are still in the bottom quartile of large-growth funds--hence the redemptions. I take heart in the fact that American Century's new leadership has a good plan for reinvigorating the firm and has already produced some positive results at its besieged flagship. However, the rebound has as much to do with a momentum rebound as changes in personnel and strategy, so I wouldn't rush in just yet.

 Fidelity Blue Chip Growth (FBGRX): redemptions $4.7 billion, 23% of assets
This fund's bias toward giant stocks has led it to modestly lag its peer group for a number of years and that hasn't changed even with a manager change and signs of life for blue chips. Manager Jennifer Uhrig has been at the helm for a year, and a sustained blue-chip rally would help, but it's hard to get too excited about this fund. Uhrig posted mixed results at her previous charge.

 Fidelity Low-Priced Stock (FLPSX): redemptions $4.1 billion, 11% of assets
It's probably not a bad thing for this closed fund to go on a diet, given its small/mid-cap focus. That was probably what Fidelity had in mind when it shut the fund to new investors including new 401(k) participants. The fund's asset size is so big that it's hard to get real excited about the fund. However, manager Joel Tillinghast is one of the best around--just check the long-term record. It's definitely a keeper.

 American Funds Washington Mutual (AWSHX): redemptions $3.9 billion, 5% of assets
This is one of a handful of funds to remain a Fund Analyst Pick since we first made picks in 1999. Back then people were giving up on the fund, too, because it was foolishly investing in companies with sound balance sheets that paid hefty dividends when it should have been speculating in Internet stocks. Naturally, it enjoyed some of its best relative performance after that bout of underperformance and outflows. I wouldn't be surprised to see it repeat that performance.

 Putnam Voyager : redemptions of $3.8 billion, 44% of assets
This fund has the highest redemptions as a percent of assets, and it's easy to see why. It's about to suffer its seventh year of underperformance in the past eight, and this one is by the biggest margin: 8.4% versus its average peer. This is at a time when large-growth funds should be making up for lost time, but this fund is still mired in the mud. Financials like  Bear Stearns  and  McGraw-Hill (MHP) have taken a bite out of returns. Managers Kelly Morgan and Rob Ginsberg took over March 2005 and implemented a strong emphasis on bottom-up stock selection. Unfortunately, their picks haven't clicked yet.

 Calamos Growth (CVGRX): redemptions of $3.6 billion, 22% of assets
This fund grew too big too fast, and its strong performance streak skidded to a halt. However, team Calamos is back in the game with a slew of winning tech stocks such as  Apple (AAPL) and  Research in Motion (RIMM). The fund is up 20% so far in 2007. Whether by choice or asset growth, management moved heavily from mid-caps to large caps around 2005. They were early, but they look pretty smart now. This is a good fund, but Calamos will have to continue to build its analyst and manager staff to support its total assets under management. 

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