(snip)"Investors Are Ditching These Four Funds in Droves
Should you stick it out?
By Karen Dolan, CFA | 06-30-08 | 06:00 AM
Outflows are typically a nuisance for fund managers who have to sell more than they are buying, but they can become a destructive force when trading volume for the fund's holdings dries up. In that case, selling can actually lead to worse losses as the fund's traders have to offer fire-sale prices in order to find a buyer. In the last 12 months we've seen a sharp increase in cases of destructive redemptions that have turned poor market returns into awful losses. The following four funds have seen a huge pickup in outflows. Have these funds' outflows crossed the line into the destructive kind? "(snip)
I won't include the names of the four specific funds listed in the article ... but ultimately this is a problem for all broadly based mutual funds. When individual investors want to cash out, the mutual fund manager is forced to sell some of the fund's stock / bond holdings in order to raise cash. To cover his own a$$, the fund manager typically chooses to sell stocks / bonds on which some actual unrealized gains exist. However, as this continues, it means that the fund is losing its 'winners' while still holding onto its 'losers' (which could only be sold at tremendous losses vs original purchase price). This basically amounts to 'dry rot' from within ... which many of the investors still holding onto their shares in these mutual funds may not be aware of !!!



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