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7 lousy funds no one should own
Fatal flaws from sky-high expenses to poor stock picking make these losers deadly for your portfolio. Heres a closer look at why you should swear them off.
By Timothy Middleton
Sometimes funds have it easy, like when their marketplace is hot. Take health care. This year, its one of only two sectors to resist the recent downdraft in stocks, with the average fund in the group up 4.5% as of May 18.
But some funds just cant be helped. Take AIM Global Health Care B (GTHBX). Please.
It has managed to lose money this year, slipping 2%. Its performance is worse than 99% of similar funds, due in part to an extravagant 2.4% expense ratio. Four health-care funds in every five are cheaper.
The mutual fund scandals have focused investors attention on poor fund companies, but the problem of poor funds is more serious because its more widespread, and thus more likely to strike large numbers of investors.
Here, culled from thousands of lousy funds, are seven you don't want to own. Not now, not ever, at least as long as they continue to be run the same way. And these arent tiny, failed portfolios; together they have billions in assets.
Thats a lot of money to throw away, particularly because with these seven deadly sinners, it doesnt matter if their markets are in or out of favor -- they manage to bungle the job in all seasons.
Value trap victim
AIM Global Health Care B: This is the only contrarian health care fund, according to Morningstar, neglecting the sectors winners for its losers, the cheap, out-of-favor sort called value stocks. The value trap, which this fund seems to have fallen into, is that some stocks deserve to be cheap.
Last year, the fund lagged its group in part because of untimely forays into hospital stocks and Japanese pharmaceutical makers. This year one of the recent top holdings was Amgen (AMGN, news, msgs), which has tumbled about 9%.
Morningstars Christopher Davis says manager Mike Yellen is capable of decent performance, but his funds expenses dont give him a chance. AIM needs to sharply reduce expenses if it wants this offering to earn our endorsement, Davis says.
An AIM spokesman says both foreign and sector funds are more expensive to manage than diversified domestic equities, and that this funds assets have declined. When assets go down, fees go up, he says.
According to AIM, the funds assets declined roughly 17% last year, to $734.4 million from $882.5 million.
Everything you don't want
CGM Mutual (LOMMX): As I reported last week, funds that blend stocks and bonds have largely resisted the markets weakness this year, but not this one.
CGM Mutual is everything you dont want in a balanced fund, says Morningstar analyst Dan Culloton. Superstar manager Ken Heebner, whom Culloton describes as a gunslinger, makes huge bets on individual securities, owning only about two dozen, putting more than 50% of assets in the top 10 positions and trading so ferociously the turnover rate is 260%, which drives up transactions costs and taxes.
Heebners free-wheeling style has made the fund No. 1 among balanced funds in the 12 months ended April 30, with a gain of 29.1%, but it wont last. Already in 2004, the fund is down 6.1%, as of May 18, ranking it the 100th percentile of its group (the very bottom). Over the last 10 years, annualized returns of 6% put it in the 89th percentile.
Toward the bottom
Gabelli Global Growth (GICPX): Talk about streaky. This fund surged more than 100% in 1999, only to suffer annual losses in the 25% range in each of the next three years. Last year, it shot up 41.4%. This year its down 6.6%, putting it into the 99th performance percentile.
Mario Gabelli was labeled a genius in the final quarter of the 20th century for identifying opportunities in media and communications stocks. The team managers of this fund have followed in his footsteps, owning such luminous names as InterActiveCorp. (IACI, news, msgs) and Liberty Media (L, news, msgs). Unfortunately, the share prices of both are underwater so far this year, by 14.2% for the former and 12.3% for the latter.
The funds annualized five-year returns of -5.6% put it in the 91st performance percentile among world stock funds. Thats for the no-load version of the shares. The broker-sold shares have worse records because their expenses are higher, 2.46% for the Gabelli Global Growth B (GGGBX). Thats at least 50% more than a fund like this should cost.
Doing even worse
MainStay Convertible B (MCSVX): Funds that invest in bonds and preferred stock convertible into common are having a tough year, with the average one down 1.7%. The income portion is threatened by higher interest rates and the convertibility option is burdened by weak stock prices.
But this fund can be relied upon to do even worse. Its down 3.6%, putting it in the 93rd percentile among convertible funds in the Morningstar database. Its nearly always in the bottom half of its category, and lately things have gotten worse. The lead manager left earlier this year, and the fund has begun delving more deeply into foreign securities, outside its traditional area of competence.
We wouldnt tell existing shareholders to run for the exits, says Morningstar analyst Todd Trubey.
But I would, unless long-term capital gains or surrender charges would be too punishing. Despite a substantial asset base and small staff, the funds expense ratio, 2.13% on the B shares, is intolerable. There are lots of excellent convert funds.
Botching the easy assignment
One Group Ultra Short-Term Bond C (OGUCX): High-quality bonds with very short durations, or sensitivity to interest-rate risk, are the safest securities markets offer, akin to bank certificates of deposit. How can you botch this assignment?
Charge too much. This best-selling retail share class has an expense ratio of 1.2%. How high is that? The institutional shares cost 0.45%. The difference is profits and payroll; payroll for brokers, that is, who could steer customers into the much less expensive A share (0.70%), but instead have put them, at the ratio of 2-to-1, into this dog.
The funds investment management isnt bad; the cheaper versions fall into the top performance quarter among such funds. But the price tag for this portfolio is a gouge, plunging it into the bottom half, and into the 74th percentile over the last five years. Thats an estimate by Morningstar -- the C shares were launched only in 2001 -- based on subtracting expenses from actual performance of the underlying portfolio. But it rings true: In the last 12 months, the fund has returned 1.14%, exactly as much as a CD. The CD is insured. This isnt.
Poor stock picking
Stratton Monthly Dividend REIT (STMDX): Real estate funds have taken a hit this year, with the average one tumbling 3.1%, second only to technologys 7.2% plunge among equity groups. But count on this fund to do worse, down 5.23%. Some 95% of similar funds have done better.
The problem here isnt expenses: They're just 1%. Instead, the problem, as this funds name suggests, is that it aims to deliver a dividend stream of income, which leads it to invest in the highest-yielding, and thus most interest-rate-sensitive real estate investment trusts. Total returns are the thing to look for in any fund, including income funds, and this ones are lousy; in the 91st percentile among REIT funds over the last 10 years.
Jim Beers, the fund's president, said the portfolio used to invest in utility stocks and didnt start investing in REITs until late in 1996. It would make sense we would lag (in 10-year comparisons), since we were not in the sector at that time, he says.
A Vanguard misfire
Vanguard Pacific Stock Index (VPACX): Now this is shock and awe. Im a well-known fan of Vanguard and of indexing. My household has six Vanguard accounts, all of them indexed.
But this fund suffers from following an index that active managers easily and consistently beat. The Morgan Stanley Capital International Pacific Free Index, which this portfolio tracks, is dominated by Japanese stocks, which have been a lousy category. But even within that category this fund's performance is unsatisfactory.
So far this year the fund is up 1.2%, worse than 59% of other Japan stock funds. Over the last 10 years, two-thirds of rival funds have done better. The reason why is obvious: Active management has run rings around this index. Even Vanguards rock-bottom 0.30% expense ratio cant overcome this design flaw.
A Vanguard spokeswoman said Morgan Stanley Capital International has made adjustments within the last year to the index the fund tracks, which should make a marked improvement going forward.
You cant complain when your funds go down because of fickle market psychology or other matters beyond a managers control. But if individual funds consistently rank poorly among their peers, you can and should avoid them.
Its easy to discover if they do: Follow this link to view the returns and performance percentiles for the Vanguard fund. You can get to this same information for any fund by first getting a quote and then clicking on Returns on the left-hand side of the page. Some funds consistently rank among the top 25% of their peers. Why would you own any that consistently fall below that?
At the time of publication, Timothy Middleton didnt own any securities mentioned in this article.
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