I'm considering replacing my poor-performing Janus Mercury fund with another in its category. Which one should I pick?
QUESTION: I'm considering replacing my Janus Mercury fund (JAMRX) with the best fund in its category, large-cap (growth). Which fund has the greatest potential? Also, do you recommend that the replacement fund should have a smaller asset base?
ANSWER: First off, we're not investment advisers, and we don't recommended specific investments. So our advice will be more general.
Like a lot of aggressively positioned large-cap growth funds, Janus Mercury had trouble in 2000 and 2001. In both years, it ranked in the bottom quartile of the large-cap growth category, with losses of 22.8% and 29.8%, respectively. It probably hurts to see those dismal numbers on your brokerage statements.
But before you get out of this fund, make sure you're doing it for the right reasons. While yearly returns are an important consideration, there's more to evaluating a fund's performance than that. You should also look at long-term results, volatility and size, among other things.
A lot of investors bought Janus Mercury when it was peaking in early 2000 or late 1999, and they haven't enjoyed any upside. But if they were to sell now, they'd be guaranteed to make the worst investing mistake possible, says Christine Benz, a senior analyst at Morningstar: buying high and selling low. We don't know when you bought Mercury, but we urge you not to be hasty. Think things through before pulling the trigger.
The most important rule in fund investing is also the one most often broken: Don't chase performance. When shopping for mutual funds, it's hard not to be attracted to the recent top performers. But selling Janus Mercury now and buying into the latest highflier might add to your misery should it crash in the next year or two.
It's important to look beyond short-term returns and examine a fund's long-term performance, says Bob FitzSimmons, a certified financial planner from Lincoln, Neb. A portfolio that hasn't performed well over the past couple years might have done far better over a longer term. For example, Janus Mercury is in the top 12th percentile in its category over a five-year period and the top third over the past three years, according to Morningstar. "Even though its recent performance has suffered, I do expect it to participate better in growth rallies in the future than it has recently," says Benz.
You should also consider volatility when deciding whether to dump a fund. While Janus Mercury has an impeccable long-term track record, it has high volatility -- and therefore high risk -- relative to the other funds in its category. If that's something you're uncomfortable with, you might think about swapping into a more even-keeled fund, says Benz. On the other hand, if this is one of your aggressive holdings by design, it might be a perfectly fine choice. Stick to your personal investment preferences and asset allocation and remember to think about how Janus Mercury fits into your overall plan.
The size of a fund's asset base is also something to consider. As you probably know, Janus Mercury is a large fund with about $8 billion under management. A fund of that size might have less maneuverability when it comes to taking advantage of sudden shifts in the marketplace, says FitzSimmons. On the other hand, while smaller funds can pounce on opportunities faster than bigger funds, they're also less capitalized and can blow up more easily. That makes them riskier. For more on this, click here. And for more help on whether or not to dump your fund, click here.