It shouldn't surprise anyone that investors can be a very fickle bunch. There's not usually a lot of loyalty to their investments, especially when it comes to mutual funds. As soon as a fund begins to underperform, most folks are quick to pull the trigger and go off in search of another fund that has a better short-term performance record. There are a number of funds that have been experiencing significant net outflows so far this year.
Is this because investors are just being their normal, fickle selves? Or are there deeper reasons behind the outflows?
Heading for the exit
According to Morningstar data, here are the 20 mutual funds with the largest estimated net outflows so far this year through the end of May:
Net Outflows (YTD)
|American Funds Growth Fund of America (AGTHX)||$9.54 billion|
|PIMCO Total Return Fund (PTTAX)||$4.40 billion|
|American Funds Bond Fund of America Fund (ABNDX)||$3.88 billion|
|Fidelity Diversified International Fund (FDIVX)||$3.60 billion|
|American Funds Capital World Growth & Inc (CWGIX)||$3.08 billion|
|American Funds Capital Income Builder (CAIBX)||$2.86 billion|
|Fidelity Advisor Investment Grade Bond (FGBAX)||$2.79 billion|
|Fidelity High Income Fund (SPHIX)||$2.73 billion|
|Davis New York Venture Fund (NYVTX)||$2.51 billion|
|Fidelity Magellan Fund (FMAGX)||$2.34 billion|
|American Funds Investment Co. of America (AIVSX)||$2.17 billion|
|Fidelity Capital and Income Fund (FAGIX)||$1.99 billion|
|Vanguard GNMA Fund (VFIIX)||$1.91 billion|
|Hartford Capital Appreciation Fund (ITHAX)||$1.60 billion|
|Fidelity Overseas Fund (FOSFX)||$1.50 billion|
|American Funds Washington Mutual Inv Fund (AWSHX)||$1.39 billion|
|Fairholme Fund (FAIRX)||$1.34 billion|
|Goldman Sachs High Yield Fund (GSHAX)||$1.26 billion|
|Dodge & Cox Stock Fund (DODGX)||$1.25 billion|
|Templeton Growth Fund (TEPLX)||$1.18 billion|
If you own one of these funds, should you be worried that a billion dollars or more has simply walked out the door this year? Are other investors privy to some unfavorable information about the fund that you aren't?
In general, I don't think investors need to panic when their fund suffers outflows, especially in a volatile, uncertain market environment like we've seen this year. Redemptions are common when investors get spooked and seek the safety of bonds and cash. And given that many of these funds are simply some of the biggest mutual funds around, it's not surprising to see big dollar amounts leaving. But to get a clearer picture of whether a fund is in trouble, you need to dig a bit deeper and look at what else is going on.
It's interesting that six American Funds land on the list of funds with the biggest outflows. Despite their well-earned reputation and solid team-based investing approach, American Funds has been losing a lot of assets in the past year or two. Investors and financial advisors have been disillusioned with middling performance by some of the shop's funds while expressing concern that many of the funds are just getting too big. While asset bloat could be a problem for American Funds at some point, I think a lot of people are ditching the funds too soon. There really aren't any truly bad funds in the line-up, and long-term performance has been very good. Don't worry about other folks jumping ship here; there's a lot to like with American Funds' offerings.
Likewise, it's not surprising to see some funds on the list that have encountered a spell of bad performance, most notably Fairholme. Manager Bruce Berkowitz has loaded up the fund with battered financial names, including Bank of America
But I would urge fundholders to sit tight here. Berkowitz is still a top-notch manager and has a solid track record of success. Give this bet some more time to work out. The same thing goes for Davis NY Venture, which has also been hurt by its heavy allocation to financials in recent quarters.
I would also guess that uninspiring recent performance explains why a few other good funds are showing up on the list, including Dodge & Cox Stock and Fidelity Diversified International. Dodge & Cox Stock got hit hard with its bet on financials during the financial crisis, which dragged down short-term performance. But the long-term picture is bright here, and the fund is well-positioned to take advantage of a rebound in tech spending with its holdings in low-P/E technology giants Hewlett-Packard
A change in strategy
While bonds have been the star of the show for several years now, some investors have been waking up to the fact that bonds are pretty much at the end of their bull run. As such, it's not surprising to see people taking money off the table and putting it back to work in the stock market. There are several excellent fixed-income funds on the list, including Bill Gross' Pimco Total Return, Fidelity High Income, Fidelity Capital & Income, and Vanguard GNMA. If you own any of these funds, stick with them and don't worry about the outflows -- they're still good long-term bets, even if future returns aren't as impressive as recent past performance.
Of course there are a few funds on the big outflow list that investors might want to think twice about sticking with. Fidelity Magellan still hasn't been able to turn its fortunes around, which is surprising, since I think Harry Lange is a talented stock picker. But the fund has been struggling, despite making some good calls by investing in Apple
Likewise, middling performance at Fidelity Advisor Investment Grade Bond, Templeton Growth, and Fidelity Overseas has likely contributed to recent outflows. However, longer-term performance under current management hasn't been impressive either, and there are better fund options out there.
The remaining funds on the list, Hartford Capital Appreciation and Goldman Sachs High Yield, look like they have more to offer than recent performance would suggest. While recent results haven't been stellar, I'd be willing to give these funds a chance to make up some ground and regain their luster. But there are still more attractive funds out there that have proven themselves more able at getting the job done.
Ultimately, when you're looking at fund inflows or outflows, you need to dig deeper into each fund's makeup and process to determine whether there is an underlying issue or just investor skittishness. Whichever way the chips fall, sticking with good, time-tested funds even through difficult times is the key to success in fund investing.
Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda owns shares of Fairholme. The Fool owns shares of and has opened a short position on Bank of America. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple, creating a diagonal call position on Microsoft, and creating a bull call spread position o n Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.