Caughtin A Storm - Page 3 of 6

Caughtin A Storm

their portfolio in one stock or one fund. For 2004, I’ll try to convince Carl to spread his investments around to some other funds.” Peoples, in the meanwhile, has another issue to discuss with Baptist at their next meeting. “Our children’s 529 college savings accounts are in a plan run by Putnam, which is a matter of concern,” he says. “When we sit down together, I’ll ask [Osmond] about moving to another 529 plan.”

Whether you hold funds from dysfunctional families in a 529 plan, a retirement plan, or a personal account, there are reasons to bail out as well as reasons to stay put. Here’s why you might want to stay:

The fund might have been a top performer. For example, Strong Advisor Small Cap Value Fund (SSMVX) has returned more than 22% per year for the past five years, among the best of all mutual funds. If you currently hold this fund (which is closed to new investors), would you want to pull your money out and try to find another small-cap fund that will perform as well, just because the parent company has had problems?

You might owe taxes. Leaving a fund from which you gained a profit will trigger a capital gains tax, assuming it’s not in a retirement account, says Baptist: “If you’ve owned the fund less than a year, you’ll have a short-term gain taxed at your highest rate.” If you move out of a top fund, such as the Strong entry mentioned above, th
e tax bill could be enormous.

You might owe fees. “Some investors don’t realize they own B shares of a mutual fund,” says Baptist. “If that’s the case, you might owe a deferred sales charge if you move to another fund family in less than two years time.”

There may also be fees to pay and paperwork to fill out if you want to move from one 529 savings plan to another. “Unless there is a strong desire to switch right away, I may advise investors to wait for a while,” says Peace. “I’ll keep an eye on events and let clients know if they should act.”

Here’s why you might want to switch:

Possible manager distraction: “If the managers at your fund are thinking about defending themselves against lawsuits,” says Johnson, “they’re not thinking about picking the best stocks for you.”

Possible manager departures: Top-performing managers at tarnished families may get better offers elsewhere. “It’s probably not much fun working for some [scandal-ridden] companies these days,” says Benz. “We’ve seen manager defections from some fund families.”

Greater caution, lower returns: Money is already flowing out of families named in the scandals. “If managers expect heavy redemptions, they may hold more cash than they normally do,” says Johnson. Low-yielding cash is likely to reduce returns for long-term investors. Alternatively, if the manager stays in stocks but eventually has to sell some holdings to meet redemptions, there’s a chance those stock prices will be depressed by the selling pressure.

Fewer investors, higher expenses: “There may be a ‘run on the