Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our sixth annual fund turkey awards. With this series we’ve developed a nice track record identifying lousy funds before they get wiped off the map by forced extinctions or mergers – or just sued into oblivion by limousine-chasing lawyers – and we aim to keep up the good work. (Our methodology helps identify great funds, too - which is why our MAXadvisor Powerfund Portfolios continue to post market-beating numbers)
This year is full of fund turkeys that are plump, juicy, and full of trans fats.
The MAXfunds Turkey Awards: Suitable for framing or “Exhibit A” in shareholder class-action lawsuits.
The “Losing Real Money” Award
Winner: Oppenheimer Real Asset A (QRAAX)
Money always piles into a fund right before the music stops. You can’t really blame the fund company. Oppenheimer Real Asset launched in 1997 – and immediately tanked about 50%.
Investors shied away from commodity investments for a few years. After a big run in commodities in recent years, they piled back in -- just in time to lose money. Oppenheimer Real Asset is up pretty big in recent years, but investors have lost a few hundred million dollars in the fund nonetheless.
In the 2005 movie A History of Violence, mob kingpin Richie Cusack (after his henchmen fail to kill someone after a perfect setup) says, “How do you f*** that up?”
Fund shareholders looking over their account statement this year are probably saying the same thing. What with the commodity boom? The financial media is still ga-ga for gold, gas, oil and other metals?
Yet low and behold, Oppenheimer Real Asset (much like the benchmark Goldman Sachs Commodity Index) is down over 10% in 2006, while the S&P 500 is up over 10%. Even thought the fund is up big over the last few years, it has still managed to destroy a few hundred million of fund investor money. That’s because so many people piled into commodities and this fund at the very peak, after the run-up. Too late.
Fund investors would have done better in fake assets this year: Stocks and bonds.
For those who are still hot for commodities, consider less expensive alternatives to Oppenheimer Real Asset (a load fund), like iPath Dow Jones-AIG Commodity Index TR ETN (DJP), iPath GSCI Total Return Index ETN (GSP), the PowerShares DB Commodity Index Tracking Fund (DBC) or the iShares GSCI Commodity-Indexed Trust GSG.
Over long periods of time commodities should roughly match inflation -- a lousy return. But fund investors tend to buy after big runs (and exciting new fund launches), all but ensuring poor returns.
The “Losing Money In Up AND Down Market” Award
Winner: Black Pearl Long/Short (no ticker)
The Curse of the Black Pearl. As we’ve noted before, fund companies generally need the wind of a rising stock market at their back to cover high expenses, trading commissions and generally mediocre stock picking. Still, fund companies occasionally break out a long/short fund (or a somewhat similar market neutral fund). The goal is to prove manager prowess by making money on longs (owning stocks) and shorts (essentially betting a stock will go down).
In theory it’s a great idea. Investors would have a lower risk fund that wouldn’t swing wildly with the market – just deliver pure picking returns as the fund manager’s shorts fall and their longs rise.
Long/short funds separate wild market gyrations from the true value of active fund management. Unfortunately, the true value of active fund management is a lot less than the near double fees charged by most long/short funds. (Why not? It’s twice the work, right? Wrong.)
Black Pearl Long/Short was launched about a year ago and has promptly underperformed the S&P 500 by about 30%. That performance proves our pearl of wisdom about long/short funds: “If the bad stock picks don’t get ya, the high fees will.”
Guess who is behind this gem? Firsthand Funds. Quite frankly we wouldn’t expect any less from the fund company behind billions in shareholder losses because their tech bubble-era funds crashed and burned. At least this one won’t bring in performance-chasing fund shareholder money right before it crashes; It crashed before it brought in any money. According to the most recent report, less than a $1 million is in the fund.
THIS JUST IN! Something we can all be thankful for. Firsthand Funds filed with the SEC the day before Thanksgiving to put this fund turkey out of its misery. Usually our fund turkey articles are published BEFORE fund companies liquidate stinkers.
The “We Can Shrink Your Portfolio” Award
Winner: CAN SLIM Select Growth (CSSGX)
Remember Duncan-Hurst, the momentum fund managers from the 1990s? Well, Duncan-Hurst is back…and losing money again on momentum bets.
Duncan-Hurst managed a few funds in the go-go years, like Duncan-Hurst Aggressive Growth, Technology, International Growth and Large Cap Growth 20.
When we interviewed Beau Duncan at the very peak of the growth and tech bubble in March 2000, he let New Economy zingers fly like: “Well first of all, valuation is not part of our process,” and “I would say in general we are in a positive environment for growth stocks as opposed to value stocks.”
Not long after that, the relatively small Duncan-Hurst funds were down big time, falling far more than the S&P 500. Apparently the $7 billion under management in institutional and private accounts at Duncan-Hurst in early 2000 didn’t fare much better; Duncan-Hurst now manages $633 million.
The Duncan-Hurst mutual funds were closed, liquidated, merged, or sold to the highest bidder. While the times have changed, Duncan-Hurst is still a momentum shop and has been following this strategy for around 20 years.
About a year ago the company launched CAN SLIM Select Growth (CSSGX) – a momentum fund licensing the CAN SLIM strategy popularized by Investor’s Business Daily.
Unfortunately, momentum investing stopped beating the S&P 500 on May 9th, 2006. Mark your calendars. Since the peak in Mo-Mo investing, investors in this fund are down about 25%, while the S&P 500 is up. (Over the last 12 months ending 10/31/06, the S&P is up almost 20%, while shareholders in CAN SLIM Select Growth are down slightly.)
The fund’s 1.7% expense ratio is only going to drag on already dragging performance. Frankly, this fund should have been a much cheaper ETF.
Let this be a warning to all readers of Investor’s Business Daily: If this seasoned professional money manager missed the S&P 500 by a country mile in just a year following the CAN SLIM strategy, how do you think you’re going to do?
TURKEY ALERT FOR NEXT YEAR? Since momentum investing came to a screeching half this year, other funds will likely trail the S&P 500 for the next three to five years: Rydex Sector Rotation A (RYAMX), FundX Upgrader (FUNDX), First Trust Value Line 100 Fund (FVL) and PowerShares Value Line Timeliness Select Portfolio (PIV).
The “A Day Late And A Dollar Short” Award
Winner: WisdomTree
The mutual fund business has a long history of launching funds that would have been great ideas five years earlier but are duds the day they debut.
Firms launch funds when there’s public thirst for a strategy that’s already done very well. Usually similar funds have brought in billions and CNBC is going on and on about some hot area. By then, fund investors associate the very name of a sector or strategy with near guaranteed wealth creation: Tech, Internet, Growth, Emerging Market, Biotech, China, Telecom, and Energy. These were all must-have funds at one time or another.
Back in 1999, you couldn’t give away a yield-oriented fund. Go back and look at the low asset levels of almost any value fund, any REIT or any dividend or income-oriented product.
But what was out is now very in. Dividend, yield and income are three words cropping up in fund names far and wide. In the last few years we’ve seen dozens of new open-end funds, closed-end funds and ETFs offering the gift that keeps on giving: Dividends.
WisdomTree is a new ETF advisor that has cranked out over 30 new dividend-oriented ETFs this year, all promising market-beating performance from the ever-so-simple strategy of selecting high-dividend stocks. As their perpetual commercials on CNBC announce, WisdomTree’s research is “very impressive.” Unfortunately, WisdomTree couldn’t supply us with any of this “impressive research” despite repeated attempts to see this magic money formula. We even asked the president, who put his best people right on it. We’re still waiting.
Looking backward high-dividend stocks have outperformed the S&P 500. Looking backward REITs have outperformed the S&P 500. But this does NOT make them a better or even good investment now. Need proof?
Looking backward from the vantage point of 2000 growth was a better bet than value. Looking backward in 1990 Japanese stocks were a much better bet than U.S. stocks. Looking backward in 1929 buying stocks on margin was a great way to get rich.
The flagship WisdomTree product, the WisdomTree Total Dividend (DTD), has underperformed the S&P 500 since its launch in June 2006. We expect this trend to continue for the next few years. At some point in the future we’re going to recommend an over allocation to high dividend stocks. Unfortunately this fund family might have already closed its doors by then. Of course that’s when a dividend fund will be a great idea again.
Honorable Mentions
Ridiculously Expensive Index Fund: Rydex S&P 500 H class (RYSPX)
You really need an S&P 500 index fund with a 1.45% expense ratio. Here’s a possible tagline for the fund: “Passive investing with active investing fees!”
As the prospectus notes, “H-Class Shares of the Funds are sold principally to
clients of professional money managers.” That’s scary.
Things Look Great From Here: Northern Emerging Markets Equity (NOEMX)
Somebody has to launch a fund at the top. It debuted on 4/25/06, about two weeks before a big fall in emerging markets. Emerging markets have climbed back, but it’s possible this fund will never show a positive return since inception.
An ETF A Day Keeps Retirement Away: Various ETF Fund Companies
Thanks for launching over 100 exchange traded funds in 2006 because fund investors need more ill-timed and ultra-focused ideas to day trade. While in theory we like lower-fee funds and more sophisticated strategies, in practice fund investors do worse with more targeted their investment options. It’s like giving an Indy car to a teenage driver.
This ETF craze will not end well for investors.
Large Cap Is Back But Just Not Here: American Century Select (TWCIX)
Finally large cap growth funds are having a good year but not this one. This fund has somehow managed to lose money and wind up in the bottom 3% of its category. That’s an embarrassing return outdone only by another family product, American Century Ultra (TWCUX).
At least it’s not a closet index fund. Clearly.
Fund Managers Of The Year. Just Not This Year
Bill Miller, Tom Marsico, Bill Gross, John Calamos. They’re all underforming the market in 2006.
Share The Wealth…And The Losses: Janus Olympus (JAOLX)
Olympus merged with Janus Orion (JORNX), bringing with it billions in tax-loss carry-forwards from the tech crash. Now slightly less unfortunate Orion shareholders get to benefit from these Olympus losses. (The portfolio manager can realize gains and wipe them out with losses to minimize year end taxable distributions to shareholders). Both fund shareholders are now in a bigger fund that’s slightly more difficult to manage. What about fees? They remain the same. Chalk up one more tech-wreck track record swept under the rug. It’s win-win…for Janus.
Shameless Self Promoter: Elliot Spitzer (Repeat Offender)
New York State Attorney General and governor-elect continued to let many fund companies get off with lame-o “neither admit nor deny” cash settlements to bolster his own brand equity. Some of these firms blatantly stole money from their own shareholders. Rather than go after the real offenders in a multi-year smack down, a no-holds-barred fund trial of the century, Spitzer goes for the easy shakedown. Now it’s business as usual in fund land. For shame, Governor, for shame!
“Screw the shareholders. What’s in it for me?” AmSouth Bancorp
This acknowledgement is for not choosing a fund administrator based on low costs (or other benefits to fund shareholders) but based on who would kick back the most money to the advisor directly. That’s even if it meant overcharging shareholders for administrative services. This award will be shared with BISYS and a couple dozen more fund companies, once those turkeys are named publicly.
Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our sixth annual fund turkey awards. With this series we’ve developed a nice track record identifying lousy funds before they get wiped off the map by forced extinctions or mergers – or just sued into oblivion by limousine-chasing lawyers – and we aim to keep up the good work. (Our methodology helps identify great funds, too - which is why our MAXadvisor Powerfund Portfolios continue to post market-beating numbers)
This year is full of fund turkeys that are plump, juicy, and full of trans fats.
The MAXfunds Turkey Awards: Suitable for framing or “Exhibit A” in shareholder class-action lawsuits.
The “Losing Real Money” Award
Winner: Oppenheimer Real Asset A (QRAAX)
Money always piles into a fund right before the music stops. You can’t really blame the fund company. Oppenheimer Real Asset launched in 1997 – and immediately tanked about 50%.
Investors shied away from commodity investments for a few years. After a big run in commodities in recent years, they piled back in -- just in time to lose money. Oppenheimer Real Asset is up pretty big in recent years, but investors have lost a few hundred million dollars in the fund nonetheless.
In the 2005 movie A History of Violence, mob kingpin Richie Cusack (after his henchmen fail to kill someone after a perfect setup) says, “How do you f*** that up?”
Fund shareholders looking over their account statement this year are probably saying the same thing. What with the commodity boom? The financial media is still ga-ga for gold, gas, oil and other metals?
Yet low and behold, Oppenheimer Real Asset (much like the benchmark Goldman Sachs Commodity Index) is down over 10% in 2006, while the S&P 500 is up over 10%. Even thought the fund is up big over the last few years, it has still managed to destroy a few hundred million of fund investor money. That’s because so many people piled into commodities and this fund at the very peak, after the run-up. Too late.
Fund investors would have done better in fake assets this year: Stocks and bonds.
For those who are still hot for commodities, consider less expensive alternatives to Oppenheimer Real Asset (a load fund), like iPath Dow Jones-AIG Commodity Index TR ETN (DJP), iPath GSCI Total Return Index ETN (GSP), the PowerShares DB Commodity Index Tracking Fund (DBC) or the iShares GSCI Commodity-Indexed Trust GSG.
Over long periods of time commodities should roughly match inflation -- a lousy return. But fund investors tend to buy after big runs (and exciting new fund launches), all but ensuring poor returns.
The “Losing Money In Up AND Down Market” Award
Winner: Black Pearl Long/Short (no ticker)
The Curse of the Black Pearl. As we’ve noted before, fund companies generally need the wind of a rising stock market at their back to cover high expenses, trading commissions and generally mediocre stock picking. Still, fund companies occasionally break out a long/short fund (or a somewhat similar market neutral fund). The goal is to prove manager prowess by making money on longs (owning stocks) and shorts (essentially betting a stock will go down).
In theory it’s a great idea. Investors would have a lower risk fund that wouldn’t swing wildly with the market – just deliver pure picking returns as the fund manager’s shorts fall and their longs rise.
Long/short funds separate wild market gyrations from the true value of active fund management. Unfortunately, the true value of active fund management is a lot less than the near double fees charged by most long/short funds. (Why not? It’s twice the work, right? Wrong.)
Black Pearl Long/Short was launched about a year ago and has promptly underperformed the S&P 500 by about 30%. That performance proves our pearl of wisdom about long/short funds: “If the bad stock picks don’t get ya, the high fees will.”
Guess who is behind this gem? Firsthand Funds. Quite frankly we wouldn’t expect any less from the fund company behind billions in shareholder losses because their tech bubble-era funds crashed and burned. At least this one won’t bring in performance-chasing fund shareholder money right before it crashes; It crashed before it brought in any money. According to the most recent report, less than a $1 million is in the fund.
THIS JUST IN! Something we can all be thankful for. Firsthand Funds filed with the SEC the day before Thanksgiving to put this fund turkey out of its misery. Usually our fund turkey articles are published BEFORE fund companies liquidate stinkers.
The “We Can Shrink Your Portfolio” Award
Winner: CAN SLIM Select Growth (CSSGX)
Remember Duncan-Hurst, the momentum fund managers from the 1990s? Well, Duncan-Hurst is back…and losing money again on momentum bets.
Duncan-Hurst managed a few funds in the go-go years, like Duncan-Hurst Aggressive Growth, Technology, International Growth and Large Cap Growth 20.
When we interviewed Beau Duncan at the very peak of the growth and tech bubble in March 2000, he let New Economy zingers fly like: “Well first of all, valuation is not part of our process,” and “I would say in general we are in a positive environment for growth stocks as opposed to value stocks.”
Not long after that, the relatively small Duncan-Hurst funds were down big time, falling far more than the S&P 500. Apparently the $7 billion under management in institutional and private accounts at Duncan-Hurst in early 2000 didn’t fare much better; Duncan-Hurst now manages $633 million.
The Duncan-Hurst mutual funds were closed, liquidated, merged, or sold to the highest bidder. While the times have changed, Duncan-Hurst is still a momentum shop and has been following this strategy for around 20 years.
About a year ago the company launched CAN SLIM Select Growth (CSSGX) – a momentum fund licensing the CAN SLIM strategy popularized by Investor’s Business Daily.
Unfortunately, momentum investing stopped beating the S&P 500 on May 9th, 2006. Mark your calendars. Since the peak in Mo-Mo investing, investors in this fund are down about 25%, while the S&P 500 is up. (Over the last 12 months ending 10/31/06, the S&P is up almost 20%, while shareholders in CAN SLIM Select Growth are down slightly.)
The fund’s 1.7% expense ratio is only going to drag on already dragging performance. Frankly, this fund should have been a much cheaper ETF.
Let this be a warning to all readers of Investor’s Business Daily: If this seasoned professional money manager missed the S&P 500 by a country mile in just a year following the CAN SLIM strategy, how do you think you’re going to do?
TURKEY ALERT FOR NEXT YEAR? Since momentum investing came to a screeching half this year, other funds will likely trail the S&P 500 for the next three to five years: Rydex Sector Rotation A (RYAMX), FundX Upgrader (FUNDX), First Trust Value Line 100 Fund (FVL) and PowerShares Value Line Timeliness Select Portfolio (PIV).
The “A Day Late And A Dollar Short” Award
Winner: WisdomTree
The mutual fund business has a long history of launching funds that would have been great ideas five years earlier but are duds the day they debut.
Firms launch funds when there’s public thirst for a strategy that’s already done very well. Usually similar funds have brought in billions and CNBC is going on and on about some hot area. By then, fund investors associate the very name of a sector or strategy with near guaranteed wealth creation: Tech, Internet, Growth, Emerging Market, Biotech, China, Telecom, and Energy. These were all must-have funds at one time or another.
Back in 1999, you couldn’t give away a yield-oriented fund. Go back and look at the low asset levels of almost any value fund, any REIT or any dividend or income-oriented product.
But what was out is now very in. Dividend, yield and income are three words cropping up in fund names far and wide. In the last few years we’ve seen dozens of new open-end funds, closed-end funds and ETFs offering the gift that keeps on giving: Dividends.
WisdomTree is a new ETF advisor that has cranked out over 30 new dividend-oriented ETFs this year, all promising market-beating performance from the ever-so-simple strategy of selecting high-dividend stocks. As their perpetual commercials on CNBC announce, WisdomTree’s research is “very impressive.” Unfortunately, WisdomTree couldn’t supply us with any of this “impressive research” despite repeated attempts to see this magic money formula. We even asked the president, who put his best people right on it. We’re still waiting.
Looking backward high-dividend stocks have outperformed the S&P 500. Looking backward REITs have outperformed the S&P 500. But this does NOT make them a better or even good investment now. Need proof?
Looking backward from the vantage point of 2000 growth was a better bet than value. Looking backward in 1990 Japanese stocks were a much better bet than U.S. stocks. Looking backward in 1929 buying stocks on margin was a great way to get rich.
The flagship WisdomTree product, the WisdomTree Total Dividend (DTD), has underperformed the S&P 500 since its launch in June 2006. We expect this trend to continue for the next few years. At some point in the future we’re going to recommend an over allocation to high dividend stocks. Unfortunately this fund family might have already closed its doors by then. Of course that’s when a dividend fund will be a great idea again.
Honorable Mentions
Ridiculously Expensive Index Fund: Rydex S&P 500 H class (RYSPX)
You really need an S&P 500 index fund with a 1.45% expense ratio. Here’s a possible tagline for the fund: “Passive investing with active investing fees!”
As the prospectus notes, “H-Class Shares of the Funds are sold principally to
clients of professional money managers.” That’s scary.
Things Look Great From Here: Northern Emerging Markets Equity (NOEMX)
Somebody has to launch a fund at the top. It debuted on 4/25/06, about two weeks before a big fall in emerging markets. Emerging markets have climbed back, but it’s possible this fund will never show a positive return since inception.
An ETF A Day Keeps Retirement Away: Various ETF Fund Companies
Thanks for launching over 100 exchange traded funds in 2006 because fund investors need more ill-timed and ultra-focused ideas to day trade. While in theory we like lower-fee funds and more sophisticated strategies, in practice fund investors do worse with more targeted their investment options. It’s like giving an Indy car to a teenage driver.
This ETF craze will not end well for investors.
Large Cap Is Back But Just Not Here: American Century Select (TWCIX)
Finally large cap growth funds are having a good year but not this one. This fund has somehow managed to lose money and wind up in the bottom 3% of its category. That’s an embarrassing return outdone only by another family product, American Century Ultra (TWCUX).
At least it’s not a closet index fund. Clearly.
Fund Managers Of The Year. Just Not This Year
Bill Miller, Tom Marsico, Bill Gross, John Calamos. They’re all underforming the market in 2006.
Share The Wealth…And The Losses: Janus Olympus (JAOLX)
Olympus merged with Janus Orion (JORNX), bringing with it billions in tax-loss carry-forwards from the tech crash. Now slightly less unfortunate Orion shareholders get to benefit from these Olympus losses. (The portfolio manager can realize gains and wipe them out with losses to minimize year end taxable distributions to shareholders). Both fund shareholders are now in a bigger fund that’s slightly more difficult to manage. What about fees? They remain the same. Chalk up one more tech-wreck track record swept under the rug. It’s win-win…for Janus.
Shameless Self Promoter: Elliot Spitzer (Repeat Offender)
New York State Attorney General and governor-elect continued to let many fund companies get off with lame-o “neither admit nor deny” cash settlements to bolster his own brand equity. Some of these firms blatantly stole money from their own shareholders. Rather than go after the real offenders in a multi-year smack down, a no-holds-barred fund trial of the century, Spitzer goes for the easy shakedown. Now it’s business as usual in fund land. For shame, Governor, for shame!
“Screw the shareholders. What’s in it for me?” AmSouth Bancorp
This acknowledgement is for not choosing a fund administrator based on low costs (or other benefits to fund shareholders) but based on who would kick back the most money to the advisor directly. That’s even if it meant overcharging shareholders for administrative services. This award will be shared with BISYS and a couple dozen more fund companies, once those turkeys are named publicly.