Burned Shareholders Fail to Return as Performance Turns Around
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Wednesday, September 23, 2009

Burned Shareholders Fail to Return as Performance Turns Around

Some fallen funds cannot get back up, even after posting top notch performance numbers. The WSJ Fund Track column points to three household name mutual funds -- Fidelity Magellan, Legg Mason Value Trust and Dodge & Cox International Stock -- as examples of once dominant funds that stumbled on the performance front only to recover and find their once-appreciated office has fled the theater.

The trend carries an ominous implication for fund marketers: once a brand is tarnished it may be more difficult to restore its shine with investors than it was to build the reputation in the first place.

The newspaper also puts forward a larger theme; investors are failing to quickly return to all actively managed equity funds after the stock market's stumble last year. As evidence, the paper points to the $11.6 billion in net flows to index equity funds in 2009 compared to $5.6 billion of outflows to active equity products.

Fidelity Magellan is likely the most well-known fund, and that fame may be hindering its comeback (though the fund was closed to new retail shareholders for many years, perhaps causing it to drop off the radar of some potential shareholders).

Magellan has returned 39 percent year to date through September 22, according to Morningstar. That is more than double the S&P 5000 return of 18 percent and 10.5 percent more than its peer group.

Yet the stellar performance has failed to draw net flows. Through August Magellan has seen net outflows of $1.5 billion. As such, Magellan remains a shadow of what was once the industry's largest fund with just $23.9 billion of assets. Investors and 401(k) plan sponsors may be looking at the fund's 49 percent loss in 2008.

All eyes are also on Legg Mason Value. That fund became a poster child case for the financial crisis after Bill Miller doubled down on some of the most troubled stocks the financial crisis (including AIG and Bear Stearns), only to see his bets lose nearly all and the fund drop 55 percent.

So far this year the fund is up 39 percent, well ahead of the market.

Still, shareholders have pulled $902 million from the fund. For Miller, one dismal year is overshadowing 16 years of topping the S&P 500.

Dodge & Cox International is another once top fund that crashed in 2008 and rebounded this year yet is performing to a seemingly empty house. The fund lost 47 percent in 2008 and gained 45 percent so far this year.

Yet, like Magellan and Value Trust, shareholders are pulling assets. So far $790 million has gone out the door.

One last fund mentioned in the article is Templeton Growth. That fund lost 43 percent in 2008 and is up 26 percent so far in 2009. Shareholders have pulled a net $1.4 billion from the fund despite the turnaround.

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