BOSTON (CBS) – Do you have a sell strategy as well as a buy strategy for your mutual funds?

If you are like most investors, you do not. Many people buy mutual funds on a whim. I am suggesting you spend a bit more time on your portfolio.

Morningstar recently had a very good article by Christine Benz about when to consider selling your mutual fund. What prompted the article is that Bill Miller, the most successful manager of the Legg Mason Capital Value fund, will be leaving the fund in April of this year.

Not all mutual funds will give you a 6-month notice that the fund manager is leaving. So if the fund has grown around a fund manager such as the case at Legg Mason with Miller do you sell or stay?

For right now, you should consider staying the course. If you have the fund in your 401(k) plan continue contributing each month. This is a very high profile change but most other changes are not.

So Benz’s advice is as follows:

1. How active was the fund manager?

If you are investing in an index fund, don’t worry. But if the fund was built around the manager’s strategy like Legg Mason the change deserves much more scrutiny.  The “Process” component of Morningstar’s new Analyst Ratings, which is a free download, can help you figure it out.

2. How big is the change?

Some mutual funds are managed by teams so if one person leaves the fund stays on course. Legg Mason was not run by a tyrant but the buck did stop at Miller’s desk. The new manager has worked with him for over a year but still assume there will be some change. You will need to be watchful of any major changes in the fund’s philosophy.

3. What do you know about the new person?

Where have they worked before, their previous experience, their track record, education?

4. How good is the firm as a steward?

Small firm? Large? How shareholder friendly are they?

5. Will the fund still be a fit for you?

If the fund begins to change its character because the new manager strays from the fund’s fundamentals it may be time to sell.  For example, it’s a small cap fund but the new manager begins acquiring large cap stocks. Will it still be a fit for your portfolio?

6. Could there be tax implications?

As always a biggie. If you do decide to sell, what are the tax implications? If the fund is in your 401(k) no worry but if it is not and it’s a large holding what do you do?

  1. Kevin Cimring says:

    Hi Dee, I think this is very sound advice, thanks for sharing with readers. Over at the Jemstep blog, we also wrote about some key points to consider when it comes to changing mutual funds which might be worthwhile for readers to review:
    (Disclaimer: I am COO of Jemstep.)
    Many thanks.


Leave a Reply

Please log in using one of these methods to post your comment:

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s