Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our seventh annual fund turkey awards. With over 25,000 funds (counting all share classes and ETFs) out there, there are plenty of Butterballs to go around this Thanksgiving.
You’d have to be hiding under a rock to have missed all the mortgage loan problems haunting Wall Street in 2007. Somewhere in the middle of this year’s sub-prime mess (just after questionable lenders went belly up but just before mega banks started taking tens of billions in write downs while their stocks plummeted) – some mutual funds got hit.
The funds affected were short or ultra short term bond funds – sometime called “low duration” funds. After money market funds, these are supposed to be the safest type of fund an investor can own - the place to put money you really don't want to lose.
The pitch for ultra short term funds addresses bond investor’s two biggest fears: the fear creditors will default and the fear interest rates will rise, hurting existing bonds.
Traditionally low duration has meant that a fund owns bonds just a year or two away from maturity. However, low duration goals could also be achieved by buying pools of much longer term adjustable rate mortgage debt. An interest rate increase doesn’t really matter (in theory) if the rates on the loans can reset higher, as is the case with most home equity loans. If they are working like they should, when interest rates climb, these funds won’t get slammed, unlike longer duration bond funds which can fall 10% or more.
Of course, lending money out over many years based on equity in a home that was valued in the last few years of a housing bubble has its risks, but that’s where the high credit ratings come into play. Or so everyone thought.
SSgA Yield Plus (SSYPX) was a smallish sub $200 million in assets very low fee fund that did just that – load up in adjustable rate mortgage debt. To this day the fund literature touts “high credit quality” and “sophisticated credit analysis”. Apparently high credit quality and sophisticated analysis didn’t stop Yield Plus from falling 8.65% in the third quarter of this year.
Unfortunately Yield Plus is just the tip of the sub-prime iceberg at SSgA – State Street Global Advisors, one of the world’s largest asset management companies. Some of their larger institutional funds were down as much as a third in the mortgage mayhem.
SSgA was not alone here, dozens of similar funds took a beating this year, but this one was closest to our hearts (which SSgA broke…) as we used to have it in one of our MAXadvisor Powerfund Portfolios. SSgA Yield Plus is down to a paltry $66 million in assets. An 8.65% drop in a fund that investors are expecting to fall not at all does tend to send investors packing - us included.
The “Lets Buy The Same High Risk Junk In All Our Funds” Award
Winner: Regions Morgan Keegan
Remember when the tech crash took just about every Janus stock fund down with it? Trouble was, as we pointed out in 2000, most Janus funds all owned substantially similar stocks. By looking at the performance of several Regions Morgan Keegan bond funds (owned by Regions Financial (RF), it seems like there was more variety in their fund names than in their fund holdings. Though a few of their bond funds are not down by half or more, its clear the fund managers favored some (questionable) asset-backed debt in all of their portfolios. If consistency in fund management is a virtue, RMK is your family.
Here is their complete list of RMK taxable bond funds with YTD performance as of this week, courtesy of our friends at Morningstar:
RMK Advantage Income Fund (RMA): -62.08%
RMK High Income Fund (RMH): -62.66%
RMK Multi-Sector High Income Fund (RHY): -61.07%
RMK Strategic Income Fund (RSF): -61.86%
The closed end funds use leverage, which RMK was careful not to cut back on even as mortgage backed securities yielded less and less over borrowing costs.
Maybe RMK just needed one fund, “RMK (not so) Select Bond”
For the record, most bond funds are up 5% or more this year.
Incidentally, we’re sniffing around this family for some distressed investing for 2008. Check out our 2008 Hotsheet for more.
Now that the Nasdaq is the top major index and Google stock is kissing $700 a share, you’d think that some of the old dot com era funds would be having a good run. While there are some cases of comeback stories – like Jacob Internet (JAMFX) – there are also some unfortunate tales of funds that have fallen but can’t get up.
It’s almost cruel of us to pick among the remains of the (tech bubble) days, because several ill fated new economy funds that launched a few months, weeks, or even days from the peak in the Nasdaq in 2000 have been closed or merged out of existence. Still, attention must be paid.
According to the fund family's website, “Seligman has been in business for more than 140 years, at times playing a central role in the financial development of the country and its markets.” Apparently such an illustrious past didn’t keep them from falling for the tech bubble.
After a bold start in 1999, Seligman New Technologies Fund started a long slide from the $45 range to under $3 today, where it has remained for the last three years, even as most other tech funds have gained significantly from their lows.
The reason this fund hasn’t staged a comeback (like other tech funds) is that it over-dosed on illiquid venture capital investments in dot-com era businesses - many of which didn't make it out of 2001 alive. Seligman spent much of 2007 trying to find buyers for its “private placements” in new economy startups, the ones that could be sold that is. Multimillion dollar investments in companies like techies.com are worthless. The small amounts of cash raised in the sales is being distributed to shareholders and management as fees.
Honorable mention should go to Van Wagoner Emerging Growth (VWEGX), another bubble fund plagued by such private placements (direct equity investments by accredited investors and institutions not available to the general public). When this fund scored a 291% return in 1999, few probably thought that fund's performance over the subsequent seven years would be about the worst of any fund in existence.
Too bad. Let’s give the fund a pass on the 2000-2002 crash that (along with other Van Wagoner funds) destroyed billions of investor capital… the last four years have been so unbelievably bad you would think the Nasdaq was at 500.
Van Wagoner Emerging Growth stunk in 1997 and 1998 too. What was it about the 1999 market that lead to an near perfect inverse relationship between manager quality and performance? Like most Van Wagoner funds, this fund had a red light rating on our site in 2000.
It's Not an Honor Just to be Nominated.
Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our seventh annual fund turkey awards. With over 25,000 funds (counting all share classes and ETFs) out there, there are plenty of Butterballs to go around this Thanksgiving.
The “A Tad Riskier Than We Said” Award
Winner: SSgA Yield Plus (SSYPX)
You’d have to be hiding under a rock to have missed all the mortgage loan problems haunting Wall Street in 2007. Somewhere in the middle of this year’s sub-prime mess (just after questionable lenders went belly up but just before mega banks started taking tens of billions in write downs while their stocks plummeted) – some mutual funds got hit.
The funds affected were short or ultra short term bond funds – sometime called “low duration” funds. After money market funds, these are supposed to be the safest type of fund an investor can own - the place to put money you really don't want to lose.
The pitch for ultra short term funds addresses bond investor’s two biggest fears: the fear creditors will default and the fear interest rates will rise, hurting existing bonds.
Traditionally low duration has meant that a fund owns bonds just a year or two away from maturity. However, low duration goals could also be achieved by buying pools of much longer term adjustable rate mortgage debt. An interest rate increase doesn’t really matter (in theory) if the rates on the loans can reset higher, as is the case with most home equity loans. If they are working like they should, when interest rates climb, these funds won’t get slammed, unlike longer duration bond funds which can fall 10% or more.
Of course, lending money out over many years based on equity in a home that was valued in the last few years of a housing bubble has its risks, but that’s where the high credit ratings come into play. Or so everyone thought.
SSgA Yield Plus (SSYPX) was a smallish sub $200 million in assets very low fee fund that did just that – load up in adjustable rate mortgage debt. To this day the fund literature touts “high credit quality” and “sophisticated credit analysis”. Apparently high credit quality and sophisticated analysis didn’t stop Yield Plus from falling 8.65% in the third quarter of this year.
Unfortunately Yield Plus is just the tip of the sub-prime iceberg at SSgA – State Street Global Advisors, one of the world’s largest asset management companies. Some of their larger institutional funds were down as much as a third in the mortgage mayhem.
SSgA was not alone here, dozens of similar funds took a beating this year, but this one was closest to our hearts (which SSgA broke…) as we used to have it in one of our MAXadvisor Powerfund Portfolios. SSgA Yield Plus is down to a paltry $66 million in assets. An 8.65% drop in a fund that investors are expecting to fall not at all does tend to send investors packing - us included.
The “Lets Buy The Same High Risk Junk In All Our Funds” Award
Winner: Regions Morgan Keegan
Remember when the tech crash took just about every Janus stock fund down with it? Trouble was, as we pointed out in 2000, most Janus funds all owned substantially similar stocks. By looking at the performance of several Regions Morgan Keegan bond funds (owned by Regions Financial (RF), it seems like there was more variety in their fund names than in their fund holdings. Though a few of their bond funds are not down by half or more, its clear the fund managers favored some (questionable) asset-backed debt in all of their portfolios. If consistency in fund management is a virtue, RMK is your family.
Here is their complete list of RMK taxable bond funds with YTD performance as of this week, courtesy of our friends at Morningstar:
RMK Select High Income (MKHIX): -54.45%
RMK Select Intermediate Bond (MKIBX): -42.73
RMK Select Fixed Income (RFIFX): -1.83%
RMK Select Limited Maturity Fixed Income (RLMGX): -4.70%
RMK Select Short Term Bond (MSBIX): -9.60
Closed end funds, market returns:
RMK Advantage Income Fund (RMA): -62.08%
RMK High Income Fund (RMH): -62.66%
RMK Multi-Sector High Income Fund (RHY): -61.07%
RMK Strategic Income Fund (RSF): -61.86%
The closed end funds use leverage, which RMK was careful not to cut back on even as mortgage backed securities yielded less and less over borrowing costs.
Maybe RMK just needed one fund, “RMK (not so) Select Bond”
For the record, most bond funds are up 5% or more this year.
Incidentally, we’re sniffing around this family for some distressed investing for 2008. Check out our 2008 Hotsheet for more.
The “What Tech Comeback?” Award
Winner: Seligman New Technologies Fund I
Honorable Mention: Van Wagoner Emerging Growth (VWEGX)
Now that the Nasdaq is the top major index and Google stock is kissing $700 a share, you’d think that some of the old dot com era funds would be having a good run. While there are some cases of comeback stories – like Jacob Internet (JAMFX) – there are also some unfortunate tales of funds that have fallen but can’t get up.
It’s almost cruel of us to pick among the remains of the (tech bubble) days, because several ill fated new economy funds that launched a few months, weeks, or even days from the peak in the Nasdaq in 2000 have been closed or merged out of existence. Still, attention must be paid.
According to the fund family's website, “Seligman has been in business for more than 140 years, at times playing a central role in the financial development of the country and its markets.” Apparently such an illustrious past didn’t keep them from falling for the tech bubble.
After a bold start in 1999, Seligman New Technologies Fund started a long slide from the $45 range to under $3 today, where it has remained for the last three years, even as most other tech funds have gained significantly from their lows.
The reason this fund hasn’t staged a comeback (like other tech funds) is that it over-dosed on illiquid venture capital investments in dot-com era businesses - many of which didn't make it out of 2001 alive. Seligman spent much of 2007 trying to find buyers for its “private placements” in new economy startups, the ones that could be sold that is. Multimillion dollar investments in companies like techies.com are worthless. The small amounts of cash raised in the sales is being distributed to shareholders and management as fees.
Honorable mention should go to Van Wagoner Emerging Growth (VWEGX), another bubble fund plagued by such private placements (direct equity investments by accredited investors and institutions not available to the general public). When this fund scored a 291% return in 1999, few probably thought that fund's performance over the subsequent seven years would be about the worst of any fund in existence.
Too bad. Let’s give the fund a pass on the 2000-2002 crash that (along with other Van Wagoner funds) destroyed billions of investor capital… the last four years have been so unbelievably bad you would think the Nasdaq was at 500.
Van Wagoner Emerging Growth stunk in 1997 and 1998 too. What was it about the 1999 market that lead to an near perfect inverse relationship between manager quality and performance? Like most Van Wagoner funds, this fund had a red light rating on our site in 2000.