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Chuck Jaffe: Farewell to these mutual funds
No one cries when a mutual fund dies.
There is no wake. If there is an obituary — in the form of some small announcement that the investment has passed — it seldom contains information on the cause of death.
And yet, each year, hundreds of funds snuff it. Counting all share classes, the bell tolled for about 1,000 traditional mutual funds and exchange-traded funds that were liquidated or merged out of existence in 2012.
The departed are a motley mix of the uninspired, goofy, mediocre, the marketing failures and the big mistakes, along with a few good performers that just never clicked with the public. Most deserved to perish unnoticed, but a few left legacies and lessons that should not be forgotten, lest investors repeat those mistakes in the future.
With that in mind — and in the spirit of year-end retrospectives about famous people who died in the past 12 months — it’s time to dip into the year’s dead pool for tales from the fund crypt.
Among the funds that passed in 2011:
Yieldquest Total Return Bond: It’s not the above-average costs and below-average returns that stood out for this horrific loser, it’s wild losing streaks when it could drop 10 percent in a week that had investors wondering what the heck was going on.
YieldQuest — sold only through “preapproved registered investment advisers” — was a broad-based, market-neutral approach that was designed to make money in all market conditions. The process was a great read, but the fund proved that what looks good on paper may not work in practice.
In fact, it wasn’t market-neutral, so much as market-negative; management flailed around, but nothing worked and the troubles seemed to accelerate until YieldQuest Total Return mercifully was shut down in late August.
A loser over its entire history, the fund dumped more than 70 percent of its value in the last year of its life.
Autopilot Managed Growth: Started in 2006, the sponsor of this long-short equity fund suggested that investors “put their investment in the Fund on ‘autopilot’ by investing for the long term and deferring day-to-day investment decisions to the active management of the adviser.”
What a pleasant way to cloak the fact that managers wanted inert shareholders who stopped plotting their own course and paying attention to whether they were headed for their financial destination.
Alas, AutoPilot’s managers apparently stopped paying attention, too. Witness the fund’s website (www.autopilotfunds.com) — still active, apparently on autopilot, despite the fund’s liquidation six months ago; it describes Autopilot Managed Growth as “newly created,” a label that last was accurate in 2006.
Since then, the Autopilot fund took shareholders on a bumpy flight; it was in the bottom 5 percent of its peer group for its last one- and three-year periods, and bottom quintile since inception. The marketing said “smooth ride;” the results said “Break out the fund-sickness bag.”
The FocusShare Morningstar ETFs: I used to believe the fastest way to make a billion-dollar fund would have been to put Morningstar in the name, since the Chicago-based firm’s research is seen as the Good Housekeeping Seal of Approval by average investors. This collection of 15 ETFs proved me wrong, showing that investors look past what’s in a name.
Alas, the Morningstar sector indexes used for these funds are well-constructed and planned, and may be better than some older, better-known indexes that are much more popular. In fact, 13 of the 15 ETFs were above-average in their asset category over their short lives. So while investors seem to have figured out that a fund’s name doesn’t matter much, they missed out on the fact that what matters most is what’s in the fund itself.
Global X Food: This ETF — one of eight Global X theme-driven ETFs shuttered in February — proved two points in its short life.
First, in the rapidly expanding world of ETFs, anything that sounds like a gimmick and that doesn’t draw assets will be quickly discarded (see Global X Fishing, Farming, Waste Management, et. al.), which is why investors should wait to see if a new issue has some staying power before diving in.
Second, the fund had a noble mission — Global X planned to donate any profits earned on the fund to Action Against Hunger International — but issues with higher purposes have a tough time completing their real objective, making money for investors. In general, investors are better off picking the best funds, and donating some excess profits directly to their favored charities.
AdvisorShares Dent Tactical ETF: The mutual-fund graveyard is dotted with issues run by prognosticators, stock jockeys, hedge-fund bosses, newsletter editors and others whose reputations were built doing something besides managing a mutual fund.
Harry Dent is best known as a forecaster, using demographic trends to make big-picture calls with mixed results. His first mutual fund shuttered in 2005, and his new ETF was no better, losing 13.5 percent in its last 12 months before being liquidated in August. Relevant experience matters; if it didn’t, the Kardashians would have a mutual fund and it would be nearly the same as putting money with Dent and other fund-celebrity novices.
Thunderstorm Value: Run by John Dorfman — a longtime money manager best known for being a syndicated columnist and financial talking head — this fund had good performance (up 22.5 percent in the three years leading to its February shutdown), but never drew sufficient assets to survive long term.
Thus it expands on the lessons taught by the Dent fund, because even in the case where a celebrity actually is known for running money, like Dorfman, if the reputation isn’t big enough to bring in real dollars, the fund won’t survive for long.
Pearl Total Return and Pearl Aggressive Growth: These two small fund-of-funds had a decent record for more than 10 years, but never attracted serious assets (both had about $5 million when liquidated in September).
Size always matters in mutual funds because it helps to determine costs, but when Pearl saw its expense ratio creep up from 1 to 1.2 percent, management pulled the plug because “we believe it is no longer possible for a small fund of funds to operate with reasonable costs.”
At 1.2 percent, the funds’ expenses were below average for equity funds; we wish every fund company recognized that if it has the choice between increasing costs or shutting down, the better option for shareholders usually will be the latter.
There’s a place in mutual fund heaven for firms that put investors first when it comes to keeping or killing off a fund.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.
Copyright, 2012 MarketWatch