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Mutual Funds

The Hall of Shame

Rotten stock picking, misguided ideas and shameless greed earn these funds dishonorable mention.

The universe of 8,000 funds has $11.5 trillion of your money and a lot of talent. But it also has its share of misguided strategies, incompetence and greed. How about a real estate fund that barely turns a buck during one of the longest property booms in U.S. history? Or a "market neutral" fund that swings one way -- down? Or an ace newsletter publisher whose funds don't show the same knack for timely stock picking? We're not impressed. In fact, we're appalled. So welcome to the ceremony inducting new members into Kiplinger's Mutual Fund Hall of Shame.

Just being a lousy fund manager doesn't qualify you for the hall. And we respect fund firms that 'fess up to a mess and successfully clean it up. Calvert Group relieved the managers of Calvert New Vision Small Cap fund last March after their style of frequent trading and momentum-chasing flopped. Calvert then enlisted John Montgomery, boss of the reliable Bridgeway funds, to marry his computer stock-picking formula to Calvert's social screens. Since the change, Calvert New Vision is two percentage points ahead of its benchmark, the Russell 2000 index of small-company stocks. The fund lagged the index by an amazing 30 percentage points during the 21 months the previous managers were in charge.

But other losers fail to acknowledge their shortcomings. After an astounding 291% gain in 1999, Van Wagoner Emerging Growth fund has had one passable year amid a run of epic disasters. Garrett Van Wagoner also settled fraud charges in 2004 with the Securities and Exchange Commission. Yet his fund shop marches on, with Emerging Growth shrunk to $27 million, from $1.5 billion, and with a ten-year annualized loss of 9%. Van Wagoner's Web site talks about searching for well-priced growth companies but not the fund's inability to actually find them. That typifies the story of shameful funds. Now, on to eight others you shouldn't put your money in.

Missed the boom

On page 44 of its 2007 annual report, directors of Franklin Real Estate Securities note that the fund placed in the bottom 20% of realty funds for one, three, five and ten years. Nonetheless, "the Board found such performance to be acceptable." That speaks volumes about the ineffectiveness of fund directors. But just as disturbing is that this terrible fund (symbol FREEX) exists inside a fund company that runs many fine income-oriented funds.


Alex Peters, a 15-year Franklin veteran with a good record as co-manager in utilities and telecommunications, needs to regain his touch now that he's had some time to learn real estate. Starting at the realty fund in 2003, he did okay for a while until he mistakenly reasoned that commercial real estate would hit the skids and housing would suffer only a brief slump. So in 2006 he beefed up homebuilders to more than 20% of the fund, a fateful decision that resulted in the fund plunging from the bottom 20% to the bottom 10% of real estate funds for every marking period from three months to ten years. "Some good past performance dried up," Peters says. With the fund down 15% this year, he's punted the builders at big losses.

Forever out of step

Henry Van der Eb is a permabear. He entered the investment business during the savage 1973Ð74 bear market, and he's still waiting for "the big one" -- the crash to end all crashes. Not surprisingly, GAMCO Mathers fund, which he's run for 33 years, has been out of step for more than three decades. Over time, stocks go up more than they go down, but this handicap doesn't absolve Van der Eb from blown opportunities. In 2002, an awful year for stocks, Mathers still lost 12%. Prudent Bear fund, another actively managed sky-is-falling fund, gained 63% that year.

Last year, Van der Eb accurately predicted the housing slump, but he failed to short home-building stocks -- that is, sell borrowed shares in hopes of buying them back later for less money. Van der Eb says he held back because he feared that if the stocks rose suddenly, panicked short-sellers would rush to buy and "I could be down 20% while out to lunch." Van der Eb also likes gold, but he dislikes gold-mining stocks and can't use gold futures or exchange-traded funds because the fund can't own commodities. These compromises explain why Mathers (MATRX) has just broken even over the past ten years despite bear-fund opportunities, such as the tech bust, company scandals, 9/11 and record gold prices.

Ham-fisted picks

It's understandable that a technology fund would blow up when tech stocks crumble, as happened in 2000-02. But to resume losses long after the crash is another matter. John Hancock Technology (NTTFX), born ages ago as National Aviation and Technology, has been a continual loser from 2004 until this past spring, trailing its revived peers by eight to ten percentage points a year while charging high expenses. It ranks near the bottom among all tech funds for the past three years.


The fund's biggest current holdings, including Cisco Systems, Google and Hewlett-Packard, are respectable but don't tell the full story. The failure is in the small and midsize companies that make up the heart of the fund. Several of these stocks became worthless after the fund made seven-figure investments, and others are way down because of earnings disappointments.

Hancock won't discuss the fund with us. The ham-fisted stock selection went on so long that the company is abandoning human management of the fund in favor of a mostly computer-generated approach. Until the computers prove that they pick stocks better than the people who preceded them, watch this fund from a distance.

Gold turns to stone

Midas is a gold-oriented shop, so you might expect Midas Special to be a bearish fund like Mathers. That would partly explain its dismal record. But, no, Special (MISEX) is Midas's place to "discover opportunities" in any stock category, and at that it's a failure. The ten-year annualized return (or lack thereof, in this instance) is -2.3%, or nine percentage points per year less than that of Standard & Poor's 500-stock index. It ranks just above rock-bottom among all actively managed stock funds.

For a change, manager Bassett Winmill is having a decent year. In 2007, the fund's returns are in line with the S&P 500's, with half of Special's assets invested in Berkshire Hathaway, Hilton Hotels, Google and Leucadia National. Why, then, in 22 years of futility haven't the people running this fund made more good decisions? Tom Winmill, Bassett's son and president of the parent company, says he isn't sure of the answer to that question. He adds that his father has now identified some companies, such as Berkshire, that he knows well and likes.


Failure to deliver

Author and investment-show speaker Louis Navellier hits many bull's-eyes in his newsletters. So when Navellier launched a line of no-load funds in the 1990s, expectations were high. Instead, the Navellier funds as a group are nothing special, and Navellier Top 20, in particular, is an embarrassment.

Navellier describes Top 20 (NTGRX) as "our 20 highest-rated investment opportunities." But although the fund started off well in 1999, its fortunes soon changed. Recent returns look like those of a money-market fund -- 3% in 2004, 10% in 2005, 3% in 2006 and 8% to October 15 in 2007 -- but with many times the risk.

Co-manager Michael Garaventa, a young Navellier protégé, gamely tries to explain away the results by saying that a concentrated fund is inherently volatile, which it is. But while Navellier Top 20 has topped 10% in exactly one calendar year since 1999, Ken Heebner has done it seven times in his concentrated fund (CGM Focus).

Either Navellier's top 20 ideas aren't good enough, or the fund's quantitative stock-picking system mistimes them too often. Exhibit A: Garaventa says Top 20 owned Google in early 2006, when the company said earnings might lag expectations. The stock tanked, Top 20 immediately sold its shares, and the fund never benefited from the stock's huge rebound. Garaventa says Top 20 also suffered from a lot of quarterly earnings misses. Still, he figures that the fund's system will work out -- someday. "It would not be unheard-of to be up 20% or 25% in a quarter," Garaventa says.


We love New York, but ...

In 1997, some people in Syracuse decided New York is big and rich enough for a fund of in-state companies to succeed. They launched New York Equity fund, and through no fault of New York's, the fund flopped. New York may be home to the likes of Goldman Sachs, M&T Bank and PepsiCo, but over many measuring periods, the fund is in the bottom 10% or 20% of all growth funds.

When Syracuse money manager Michael Samoraj heard that trustees were about to liquidate the fund, he persuaded them last April to put him in charge -- his first shot at running a public fund. Samoraj says his predecessors "held on to things too long" and were inept at picking small companies. He renamed the fund Nysa (NYSAX), added a sales charge to attract brokers, ditched the New York focus and recycled the holdings 100% in favor of blue chips, such as Johnson & Johnson and PepsiCo. Now it's an obscure growth fund with expenses of more than 3% and a legacy of losing 13% in the first half of 2007, when the market advanced smartly. We wish Samoraj well, but there's no doubt he's got a steep hill to climb.

Long, short, confused

Amarket-neutral fund mixes regular stock investments (long positions) and short stock bets (you're expecting a price decline) in equal measure to insulate itself from the market's ups and downs. If you do this right, the quality of stock picking, not the market's direction, determines your return. The folks at Phoenix Market Neutral (EMNAX) aren't doing something right.

The fund hasn't earned more than 2.7% in a quarter since 2003, and it's one of the few funds of any kind to show a loss for 2007 to date, as well as over the past one, three and five years (it lost 4% annualized over the past five years). This is annoying because a once-famous name in investing -- Zweig -- is the impresario. Phoenix, a life-insurance company, now owns the management firm started by Martin Zweig and uses it to run Market Neutral.

A big problem is the fund's rapacious expense ratio. Phoenix's expenses are inflated -- and the performance nicked -- by high dividends the fund must pay to the owners of shares sold short, draining as much as two percentage points from the annual return. Phoenix is temporarily limiting expenses to less than 2%, but the actual cost of running this fund ranges from 3.6% to 4.4%. Lower-cost, more-successful market-neutral funds include TFS Market Neutral, with the best record for one and three years among this small coterie of exotic funds.

Egregious expenses

Bond-fund disasters are hard to decipher, but if you look closely at the numbers you'll find the reason for this one. All share classes of Seligman U.S. Government Securities combined collected $1.6 million in interest during the first half of 2007 and spent $529,000 of that, or 32.7%, on expenses. Only 9% of the total went to fund management. The rest went to brokers and to pay other expenses. All classes of broker-sold American U.S. Government Securities fund spent 19% of their interest income on expenses, and Vanguard Long-Term Treasury spent just 3.6%. High expenses hamstring Seligman's experienced team of bond-fund managers from the get-go.

Yet even without the expense noose, this fund is dreadful. Depending on the class of shares, five-year annualized returns run from 0.8% to 1.6%; the Lehman government bond index returned 3.5% over the same period. The fund ranks near the bottom of its category in most other measuring periods. We invited Seligman to offer its take on the trials and tribulations of this fund, but it declined.

How to spot a stinker

Want to avoid getting caught holding a Hall of Shame candidate? It helps if you avoid funds:

with expenses well above those of most of their peers.

with rapid asset growth, especially if their focus is on small companies.

whose manager suddenly start to buy securities outside their normal realm of expertise.

that have seen a key manager depart, especially when a small investment firm runs the fund.

whose strategy is so complex that you can't understand it.

that have dramatically trailed their peers for two straight years.