On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
4 Funds Losing Investors' Faith
05/11/2012 8:30 am EST
Nothing raises red flags for funds than big outflows, and these funds are seeing a sea of redemptions that investors should pay attention to, writes Greg Carlson of Morningstar FundInvestor.
When investors begin to depart a fund in droves, whether because of a manager change, poor performance, or both, it can make an already difficult situation worse. This is particularly true at small- and mid-cap funds. They tend to be smaller than large-cap funds, which means that, on average, less cash is free to meet redemptions.
That means stocks must be sold, and such funds typically hold stocks that are less liquid than large caps. Thus, the manager may have difficulty unloading them to meet redemptions without driving the stocks’ prices down significantly before doing so.
Let's take a look at a few small- and mid-cap funds that have seen big outflows recently.
Royce Value Plus (RVPHX)
This once-hot fund has had a rough go of it since its asset base expanded, along with its list of holdings, and Chip Skinner became the lead manager in 2007. The fund posted top-decile showings in the small growth category from 2002 to 2006, and investors piled in with a combined $2.5 billion tossed into its coffers in 2006 and 2007.
Now that the bloom is off the rose (the fund has lagged more than 80% of its peers over the past five years), the hot money is being shaken out. A sum of $1 billion has been pulled over the past 12 months, which represented 30% of the fund’s asset base one year ago.
The fund didn’t own more than four days’ trading volume in any of its recent top ten holdings. While that is a good sign, a fair amount of the fund is in micro-caps and small caps where forced sales could really sting. It’s a shame the fund didn’t close sooner the first time, but perhaps it will manage the situation better the next time.
T. Rowe Price Mid-Cap Growth (RPMGX)
Investors have yanked $2.3 billion from this closed fund over the past 12 months, and $2.7 billion since the start of 2011.
True, this is the third-largest actively managed small- or mid-cap fund around, at $19.3 billion in assets. But those redemption figures are still nothing to sneeze at; $2.7 billion represents more than 13% of the fund’s net assets at the start of 2011. Furthermore, longtime manager Brian Berghuis generally keeps less than 5% of assets on hand in cash.
If redemptions accelerate, trimming positions significantly could prove cumbersome: The fund owns an average of eight days’ trading volume in each of its top ten holdings. That said, the fund’s relative performance has been solid since the start of 2011 and outstanding over the long haul, so we’re not worried yet.
Fidelity Value (FDVLX)
This struggling fund has seen redemptions for four years straight now, and more than $2 billion has been pulled in the past year. That’s quite a hit for a fund that had $8.6 billion at the end of 2010.
On the plus side, about 40% of the fund is in large caps. The outflows come just after the fund underwent a major restructuring in mid-2010, when longtime skipper Rich Fentin retired. Matt Friedman took over half the assets, while the other half came under the control of a group of sector specialists.
It’s not clear whether outflows have affected performance yet: While the fund struggled on an absolute and relative basis in 2011, that showing isn’t surprising given the cyclical tilt of its holdings and investors’ flight to quality last year.
Nevertheless, the hefty outflows provide another reason to be wary of this fund along with the unproven skippers at the helm.
American Funds SMALLCAP World (SMCWX)
A total of $2 billion was pulled from this world-stock fund over the past year. The fund posted strong returns in 2009 and 2010, in part because its focus on small- and mid-cap stocks gave it a big leg up on most of its category peers, which focus on large caps.
It had $22 billion at the end of 2010 and often holds close to 10% of its assets in cash, so the $2 billion in redemptions likely hasn’t caused much trouble—particularly given the raft of portfolio managers working independently at the fund (13 total) and its broadly diversified portfolio of nearly 600 stocks.
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