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Originally published Saturday, December 28, 2013 at 8:01 PM

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Annual Lump of Coal Awards, Part 2: | Chuck Jaffe

A second helping of holiday jeers for managers, executives, firms, watchdogs and other mutual-fund-industry fumblers for action, attitude, behavior, execution or results that are misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.


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Your Funds

Nothing is better at the holidays than second helpings of the foods you love.

Consider this a second helping of food for thought.

It’s Part 2 of my Lump of Coal Awards, now in their 18th year, a dishonor presented to managers, executives, firms, watchdogs and other fund-industry fumblers for action, attitude, behavior, execution or results that are misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.

The market’s 2013 gains have made it easy to overlook ineptitude this year, but I singled out some “winners” last week whose ham-handed incompetence should earn them nothing more than a Lump of Coal in their Christmas stockings. Now it’s time for the worst of the rest.

And the losers are:

PIMCO and Invesco for being off-target with their target-date funds.

Lipper tracks six different dated categories for “mixed-asset target funds” for the years 2025 through 2050 and — when it comes to 2013 performance — Pimco’s RealRetirement funds are at the bottom of every category group that ends with a five (2025, 2035, 2045), while Invesco’s Balanced-Risk Retirement funds lag every year ending in zero (2030, 2040, 2050).

The only reason PIMCO wasn’t dead last in all groups was that Invesco was there; the reason why Invesco was not at the bottom in all groups is that it doesn’t have funds for years ending in five.

Worse, both fund groups lagged average performance in each of those categories by about 10 percentage points, difficult in a year that forgave almost all investment strategies.

The Vanguard Group, for adding injury to insult in its money-market funds.

Investors using money-market funds as safe-haven holding pens for their cash know they’re not getting much in return these days, but what shareholders in Vanguard’s three money funds got in September was completely unexpected, a capital gain.

The structure of money funds makes it that they hardly ever generate capital gains or losses; Vanguard reportedly had not had a similar experience in roughly 40 years running money funds.

What happened to generate the gain here is unimportant; this gain is not extra profits — it changes nothing about the fund’s actual returns — just extra tax headaches.

And while it’s easy to dismiss the gains as fractional — $.00009 per dollar in Vanguard Prime Money Market (so nine cents per $1,000 invested) — that’s also how you can describe returns.

In fact, the monthly income per dollar in Vanguard Prime at the time of the distribution was $. 00001, meaning the gain paid in September was equal to the income the fund generated for the entire year up to that point.

Thus, all gains for the first nine months of 2013 became taxable, leaving shareholders with a tiny capital-gains reporting issue to deal with when they file their 2013 tax returns. Yuck.

LocalShares, for rooting a little too hard for its hometown.

Plenty of people head to Nashville seeking fortune and fame, but they do it in country music, not in mutual funds.

But the people behind the LocalShares Nashville ETF (NASH) are singing the mutual-fund tune; they opened this year investing only in companies based in and around Music City, a sensible philosophy only if “the Athens of the South” is somehow immune from what’s happening in the rest of the world.

I can name this tune in two notes: OOK and TXF. Those were the tickers for two miserable, short-lived ETFs that had strategies centric to Oklahoma and Texas, respectively.

When investors don’t dance to this Nashville tune — and they won’t — you can expect to hear the familiar refrain of “I fought the law [of bad fund ideas] and the law won.”

Directors at the Valley Forge fund for forgetting their job.

The way funds are supposed to work is that the board of directors hires a manager who runs the money. At Valley Forge (VAFGX), however, the directors spent two months doing it themselves.

The saga started late in 2012, when the fund’s former manager died and the board had terminated his contract within days of, well, his ultimate termination. Enter an interim manager, hired to run the fund through March.

After that, until a permanent agreement with that manager could be reached, the board took over running the fund.

A prospectus dated May 1 noted that the directors were responsible for any trades made in April and May.

“Because none of the members of [the] Fund’s board of directors has any experience as portfolio managers, management risk will be heightened during the Interim Period, and you may lose money,” according to the prospectus.“ In particular, the Fund will be subject to the risk that [the] Board may fail to take actions that an experienced investment adviser may take.”

In actuality, the fund did surprisingly well during the interim period, but shareholders should still be upset, as they were counting on directors to make sure the fund succeeded thanks to something besides dumb luck.

John Hussman of the Hussman Funds, the Lump of Coal Mis-Manager of the Year.

Hussman is widely recognized as a savvy market observer who expertly manages risk while delivering long-term returns.

You’d have a hard time seeing that in his funds since the 2008 market crisis, however, and especially this year when it appears he mismanaged risks at a time when throwing darts at the stock tables was nearly enough to guarantee a winning portfolio.

Hussman Strategic Growth (HSGFX), the firm’s flagship with $1.4 billion in assets, is off roughly 7 percent this year, compared with the 13 percent gain of its average long-short peer, according to Morningstar.

Things were even worse at Hussman Strategic Total Return (HSTRX), which is off roughly 8.5 percent this year, dead last in its conservative-allocation category, according to Lipper.

Hussman’s “best” fund this year has been Strategic Dividend Value (HSDVX) which, according to Morningstar, lags 99 percent of its peers and trails the average fund in the category by more than 20 percentage points.

Managing risk sounds great, and Hussman has proved that it can be when the market is in sync with his strategy.

But when “managing risks” equals “missing out on gains,” something has been lost in translation, and Hussman’s shareholders paid that price this year.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.

Copyright 2013, MarketWatch



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