(MONEY Magazine) – HOW THE MIGHTY HAVE FALLEN!

Just over two years ago, Robert Beckwitt, who runs $11 billion in Fidelity's Asset Manager Fund, seemed capable of anything but healing the blind and raising the dead. In 1993 his three-year annualized gain was a spellbinding 19.8%, more than four points better than the stock market. More miraculous still, Beckwitt had outperformed stocks while keeping roughly half his assets in bonds and cash. No wonder the public heaved $5 billion at him in 1993 alone.

Then the magic faded. In 1994, as stocks rose 1%, Beckwitt lost 7%, thanks to a big, bad bet on emerging market bonds; last year, as stocks quickstepped 38%, Beckwitt strolled to an 18% return.

When a hot fund manager turns cold, investors face a dilemma: Should you sell or hang on? (In Beckwitt's case, customers yanked roughly $2 billion out of Asset Manager in 1995.) Some fund managers can skid badly, only to regain their momentum eventually. Others, though, are caught up in strategies so flawed that they never bounce back.

After the buoyant markets of 1995, when to sell a slumping fund may seem irrelevant. When the average fund gains 31%, even the managers of laggard funds look like geniuses. But bull markets don't last forever. Now--when the going is great in Fund Land--is the perfect time to think about how you'd react when it gets tough.

If your star fund does fade and you find yourself facing the dilemma of whether to sell or stay put, the one thing you should not do is avoid making a decision. Doing nothing--holding instead of selling--is fine, but only if you have carefully weighed the alternatives. Here are two points to consider:

Not even the winningest funds win all the time. Take Kenneth Heebner, the manager since 1976 of CGM Capital Development. During his tenure, CGM has outrun the S&P 500-stock index by an average of almost seven percentage points a year (21% to 14%). But every three or four years, Heebner turns colder than Neptune for a year or so. In 1994, for instance, Heebner's fund plummeted 23%, vs. the S&P's 1% gain. Why? Probably because Heebner takes big positions. When he bets right, he's superb; when he's not, he tanks. For shareholders, hanging on has been the best revenge. CGM bounced back 41% in 1995.

Another reason for fund slumps: The manager's style may just be out of favor. One year, growth stocks--companies with rapidly expanding earnings--are the rage. Next, slower-growing value stocks grab the glamour. Small and large stocks also trade time in the limelight.

These fads can run for years, but they never last forever. Consider Fayez Sarofim of Dreyfus Appreciation Fund, who loves giant growth companies like Coca-Cola, Procter & Gamble and Johnson & Johnson. In the two-year period starting in 1992, value stocks knocked Sarofim's favorites off their perch, and Dreyfus Appreciation fell badly behind the market. But Sarofim stuck to his style, and in 1995 the pendulum swung back his way; Dreyfus Appreciation shot up 38%. The lesson: Top managers who follow a strict investing discipline deserve the same from their shareholders--so hang in there.

When a once successful fund flounders, however, it isn't always because its manager is out of sync with the market. Sometimes a bad strategy takes a while to catch up with the fund. From 1991 through 1993, for example, Managers Intermediate Mortgage returned 13.3% annually, beating the typical taxable bond fund by about 35% but with only three-quarters the apparent risk. Yet the fund had been a ticking time bomb, and in 1994, it went off, blowing away 25% of its shareholders' money. It had leveraged as much as 50% more than its net assets to buy such complex derivatives as interest-only inverse PACs. They self-destructed as interest rates jumped up in 1994.

When a fund flubs this way, it's time to ask: Does this strategy make sense? Do funds using simpler techniques have returns almost as good? If the answers don't satisfy, cut and run (of course, it's best to ask such questions before you buy a fund).

Most of the time, however, patience is a virtue. Explains Charles Ellis, managing partner at Greenwich Associates, a Connecticut-based financial services consulting firm: "What do you do if you want to have a good marriage? You take it seriously. You don't have affairs. That's the same kind of relationship you should have with your fund managers."

A rule of thumb: If a fund begins lagging after several years of solid returns, give the manager three years of slack. That's enough time to see if his slump is temporary or he's become a has-been. If you don't think you can bear to wait that long, this fact may give you patience: Whenever you sell, capital-gains taxes will take up to 28% of any profits you have in the fund.

Perhaps your fund didn't fail but rather you failed to understand your fund. Beckwitt's Fidelity Asset Manager is not designed to beat the stock market; instead, its mission is to provide attractive returns with lower risk than a pure stock fund. Despite the debacle of 1994, Asset Manager has beaten its benchmark blend of 40% stocks, 40% bonds and 20% cash by an annual average of nearly two percentage points since the fund was launched seven years ago. By that standard it remains an outstanding fund.

But if you bought Asset Manager thinking it was a way to beat the pants off the stock market, then you should be disappointed--not with Beckwitt, but with yourself. You bought the wrong fund, and you should replace it with a riskier pure-stock fund. (In the process, though, you should ask yourself whether beating the pants off the market is a worthwhile goal.)

While it can be tough to distinguish the slumps from the chumps, there are a couple of warning signs:

A small-cap fund gets very big very fast. It's hard for a fund to buy a big stake in a small company without driving up its own purchase price or ending up with so much stock that it can't be easily sold. Thus as a small-cap fund balloons in size and has more money to invest, it must buy either bigger stocks or a lot more small ones, often limiting the manager's flexibility.

Look at Monetta Fund, whose assets grew 105-fold, to $408 million, from 1990 to 1992. Investors flocked to the fund because of its 55.9% return in 1991--more than 25 percentage points better than the S&P 500. The fund has lagged the index in each year since.

Consider selling a small-cap fund that gets suddenly bloated with $500 million or more. Switch to a smaller fund even if it has a less exciting record. (For more on small-cap funds, see the story on page 86.)

Expenses keep rising. Some hot funds try to cash in on their popularity by raising fees, creating an unacceptable drag on return. Example: Seligman Communications & Information, the tech fund that drew in over $1 billion last year, just applied for a 20% hike in its management fee. At 1.65% in total annual expenses, the Seligman fund already charges half again as much as T. Rowe Price Science & Technology. If your fund sends a proxy form asking you to approve a fee increase, first vote no--then if the hike goes through, trade the fund for a good performer with lower expenses.