Business

Considering dumping a losing mutual fund? Think twice

BOSTON — Fiscal fitness is knocking weight loss off the top of many New Year's resolution lists, thanks to 2008's market drubbing. That often means casting off last year's worst-performing mutual funds for more promising alternatives.

Though a recovery may be a ways off, there's plenty of opportunity now. Many funds with solid long-term records closed to new investors a few years ago but are reopening. Managers hope to raise cash and snap up potential bargain stocks.

Switching to a new fund could turn out to be a wise move, but think twice — especially after a steep market plunge. Experts advise resisting the urge to sell a fund simply because it adopts an aggressive strategy that ended up making it an unusually big loser. After all, that strategy may once again become the flavor of the day if the Standard & Poor's 500 rebounds from the 38 percent drubbing it suffered last year.

"I tend to think that if you've ridden it down this far, what's the harm in letting the dice roll again, and sticking with your manager?" said Jeff Tjornehoj, an analyst with fund tracker Lipper Inc.

But increasingly, investors are deciding against sitting still. Nearly $225 billion flowed out of stock mutual funds in 2008, the first year of negative flow since $27.5 billion was pulled out in 2002, according to TrimTabs Investment Research.

Many questions an investor should consider before pulling out of a fund are worth asking in good times or bad. But there are a few timely considerations given the market's recent slide:

Consider if yesterday's loser will become tomorrow's winners: While declines in some of the hardest-hit sectors represented corrections to stocks that had been priced too high, business fundamentals sometimes get ignored during volatile periods. That means some battered stocks could be ready to rebound — as could funds that employed risky strategies that do best in bull markets. "The classic mistake people can do is to sell off anything that lost a lot recently, and put everything into something that didn't lose a lot," said Russ Kinnel, a Morningstar Inc. fund analyst.

Conversely, funds that performed relatively well last year likely won't maintain that edge if the market shifts. Consider funds heavy on energy stocks, which surged as oil prices peaked at more than $147 a barrel in July, only to plunge as oil prices slid.

Think long term: Because 2008 was so unusual, it's especially important to consider more than just last year's performance. Evaluate three or five years, or even longer. "Even the best funds are going to have not-so-great years," said Eric Tyson, author of "Mutual Funds for Dummies." "You shouldn't necessarily give up on a fund just because it may have underperformed for one year."

Use the right benchmarks: While virtually no market sector escaped 2008's plunge, some fared better than others. Therefore it's best to consider how a fund stacked up against peers with similar investment profiles, rather than the broader market. "Did it actually do much worse than the peer group in its investment universe?" Kinnel said. "If the answer is 'No,' then you shouldn't have much to complain about."

Ask if the reasons you got into a fund still apply: Even if a fund fared poorly, consider sticking with it if there's been no change in the fundamental reasons you got into the fund — say, if you believe in the fund managers, and they're still around and have stuck with an investment philosophy that makes sense for your circumstances. If that's not the case, consider looking elsewhere. "If your fund was supposed to invest more conservatively than its peers, but it lost more than its peers last year, and if its long-term record isn't good, it may be time to leave," Kinnel said.

Watch for rising fees: Money managers cover expenses through fees that rise and fall based on a fund's asset level, and funds with more money are generally more efficient. With assets values taking a big hit, many funds are hitting "break-even points" that will trigger fee increases to cover expenses this year. Take a close look at funds' semiannual reports for fee changes, or check fund information online.

Beware the costs of fund-jumping: If you got into a fund recently but want to get out, be aware that some funds charge early redemption fees of 1 percent to 2 percent if you sell within the first six months to a year. Read fund rules in the prospectus. And if you're going to switch, consider a fund within the same fund company. Many providers don't assess fees if you switch to another one of their funds. And if a commission-based adviser is urging you to shift to a new fund, consider whether the move is worth any fee or "load" that you may pay — they can often amount to more than 5 percent of the amount invested.

Don't act out of emotion: The disappointment of seeing big losses can lead to self-blame and prompt rash investment decisions. "Don't beat yourself up over the performance of your portfolio," Tjornehoj said. "The downward trajectory caught amateurs and professionals alike off-guard by how swiftly it went down. There are many people wallowing in the same misery."

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