It's not always easy to know when to sell your investments, and that goes double for mutual funds that have fallen down on the job. Does lagging performance mean the manager has lost his or her touch, or are recent results just a temporary setback? This two-part series looks at four high-profile funds and managers that have fallen down on the job this year. Part 1 looked at the troubles at Bill Gross' Pimco Total Return (PTTAX) and Fairholme (FAIRX), run by Bruce Berkowitz. Today, we round out our discussion with a look at two more big names that have run into big trouble.
Always on the move
Ken Heebner's CGM Focus (CGMFX) is not for the faint of heart. The fund employs a rapid-fire trading strategy, quickly moving into and out of positions when Heebner sees opportunity. At last glance, the fund sported an astonishing 554% annual turnover, meaning the fund buys and sells the entire portfolio more than five times a year. While CGM Focus ranks in the top 1% of its category over the past decade, its aggressive style has been out of favor lately and the fund has fallen to the very bottom percentile of its peer group year to date. While the S&P 500 is down roughly 4.4% so far this year, CGM Focus has lost a stomach-churning 21.6%!
While I think this fund can be suitable for very risk-tolerant investors, it's certainly not the average investor's cup of tea. The fund is very concentrated, holding only 22 stocks in just a few sectors. At last glance, it owns a number of reasonably valued stocks trading at P/Es of 16 or less, such as oil well services provider National Oilwell Varco
While this fund has long-term chops, its short-term volatility will end up driving a lot of investors away. For example, the fund saw an 80% gain in 2007 before losing more than 48% in 2008. Most folks won't be able to sit through swings like that. So if you really enjoy taking on risk, and you don't mind a roller-coaster ride, CGM Focus could be a good fit for you. However, if you're like most investors, you probably want a less volatile journey and a bit more diversification. In that case, there are other, more stable large-cap growth options.
A legend dethroned
Bill Miller and his Legg Mason Capital Management Value (LMVTX) got a lot of press in the middle of the previous decade for his 15-year streak of beating the S&P 500 Index. While that's no small feat, hyping that accomplishment is an almost surefire recipe for disappointment going forward. Sure enough, the fund fell flat soon thereafter, trailing the S&P by 15 percentage points on an annualized basis from 2006 to 2008. Since the start of 2006, the fund has posted an annualized loss of 7.2% compared to the S&P 500's 2.7% gain.
All good managers will go through down periods now and then, so investors shouldn't be so quick to dismiss Miller's solid past performance. But there's no denying that things look dreadful now -- the fund ranks behind 99% of all large-blend funds over the past decade. More recently, the fund's hefty allocation to the financial sector has hurt 2011 returns, as holdings such as Wells Fargo
This fund isn't cheap -- the C shares run 1.77% per year. The more reasonable A shares will only set you back 1% annually, but they come with an onerous front-end load. If you can buy the A shares without paying the load (for example, within an employer-sponsored retirement plan), you might want to consider Legg Mason Value. Its track record certainly doesn't do a lot to recommend it, but it could surprise to the upside down the road. After all, Miller is a good manager. But don't try too hard to make this one fit in your portfolio -- there are other, more accessible options that can do just as good a job.
Behind the numbers
If you're itching to dump your losing mutual funds, take a deep breath before you push that sell button. If your fund hasn't undergone a manager change or a significant alteration to its investment process, you might want to rethink a sale. A fund headed by a solid manager with a strong long-term track record is hard to find, and you shouldn't ditch such a fund at the first sign of trouble. However, if after careful examination, you determine that there are better, more diversified, cheaper, or less risky fund options that can give you the same exposure as your current lagging fund, that's a sign you may want to sell and head on to greener pastures.