Family Feud: Deciding When to Sell a Fund

Brenda Buttner and her hubby debate whether to dump Third Avenue Value from the family portfolio.
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An honest fight every now and then is the sign of a healthy relationship, isn't it?

If that's the case, this past weekend my husband and I proved our marriage is definitely alive and well. But this time, the rather fiery feud extended beyond the usual. We fought not about motorcycles (you know, the classic v-twin vs. in-line four controversy), but about mutual funds. Yes, it was the end of the first quarter, our traditional time to take a look at where our investments stand.

In the past, we've been lucky enough, so that usually is a fairly fun process. Not this time. A big red minus sign adorned one of our funds, and Larry, not often one to act rashly, was ready to pitch it from our portfolio.

"What's with this

(TAVFX) - Get Report

Third Avenue Value?" he asked. "Our index funds, our growth guys, they're all well in the double digits for the past year. This one has been bumping along in the negative column for as long as I can remember."

Well, I couldn't argue much with the numbers. Third Avenue Value certainly hadn't joined in the recent big-cap

S&P

party. The deep value fund sank a sickening 11% in the past 12 months and was down 8% in the most recent quarter alone, according to

Morningstar

.

"Remind me again why you wanted to buy this?" Larry insisted.

No problem. The decision to buy -- very different from the decision to sell, remember -- was easy. Marty Whitman had long been a legend on Wall Street, revered as one of the best and most consistent value managers around. His Third Avenue Value was a standout for its low volatility, low turnover and strong long-term numbers. In fact, in an investment series I reported on for

CNBC

at the end of 1997, it was the only unanimous choice as a must-buy from a panel of experts that included Don Phillips of Morningstar, Sheldon Jacobs of

No-Load Fund Investor

and

TSC's

very own contributing editor

Vern Hayden

.

But the plain-talking, 70-something manager has never followed the crowd, and his penchant for "safe and cheap" often leads him straight to the unpopular. Most recently, that has been Japan and also U.S. semiconductor equipment stocks, nowhere near the sizzling go-go growth big-caps that command this market. No surprise really that 1998 was not kind to Third Avenue Value.

But sell now that we are seeing minus signs? I know a lot of Whitman's shareholders have lost faith and are bailing -- the fund has been bleeding assets -- but I wasn't so sure. Yes, "goodbye" can sometimes be the best thing to say to a mutual fund, but I needed to know this was clearly a time to let go.

Was there, as Larry wondered, an exit sign on Third Avenue Value? There are no hard-and-fast rules for when to sell, but we considered whether Whitman's fund fit my general guidelines for getting out:

  • When you're losing sleep. OK, so maybe I have lost a little shut-eye worrying about whether even Whitman & Co. could ever step out of growth's shadow, but I'm still not spending more time worrying than sleeping.
  • When a fund consistently underperforms its peers. Underline peers. Compare apples with apples. It's not fair to penalize a consistent value player for not beating the sizzling S&P. And glance beyond last week. Sure, these days it seems a fund manager is only as good as his or her latest quarter. But a closer look at the 12-month numbers reveals that Third Avenue Value is in the top 10% of its category. Its three- and five-year average annual returns are in the top fifth.
  • When your fund doesn't do what you thought it would, or should. Style drift is definitely one accusation you can't level at Third Avenue. Whitman has stuck (some might even say stubbornly) with his safe-and-cheap strategy through every kind of market, and he doesn't just buy and hold, he buys and holds and holds and holds.
  • When your manager leaves. Nope. He's still firmly at the helm.
  • When your goal (or your outlook) changes. Goals still the same here: saving for retirement and college education for our little ones.

On the outlook front, though, there is a pretty big question mark: What's the future for value? It's certainly out of style now and showing no sign it will be fashionable anytime soon. I'm not willing to say, though, that this philosophy is out-and-out dead. The hot stocks may keep boiling for a while, but not forever.

What really clinched my argument though was a reminder of the last time we decided to sell a fund. Impressed with Garrett Van Wagoner's long-term record, we eagerly jumped on board when he opened up a shop of his own. When his funds kept sinking and sinking the following year, though, my husband and I got nervous and jumped out. Of course, now it's hard to look at the list of last quarter's top three U.S. diversified stock funds. Yep, all Garrett's. A smart manager doesn't turn dumb overnight.

So I won this battle in the Buttner/Klane household. Marty sticks with us.

But if you thought this argument was spirited, check in next weekend for the sport bikes vs. Softails debate.

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner owned shares of the Third Avenue Value fund, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.