Fund list exposes 'lemons' 89 underperform their peer groups

INVESTING

May 17, 1998|By BILL ATKINSON

WHAT investor could pass up the Phoenix Mid Cap mutual fund? It cranked out a 30.84 percent return last year.

But that's not good enough for mutual fund expert Douglas Fabian.

The way he sees it, Phoenix Mid Cap is a "lemon," and investors should sell their stakes "immediately."

Most investors probably would be patting Phoenix's fund manager on the back for a job well done, but Fabian says the mutual fund not only trailed the performance of competing funds in its peer group last year, but it has lagged for the past five years.

"We have lemon laws to protect us from bad cars, but we have nothing to protect us from bad funds," said Fabian, the president of Fabian Investment Resources, a Huntington Beach, Calif.-based investment advisory newsletter service.

Fabian has come up with a list of 89 mutual funds that he says investors should avoid. "These funds are the worst offenders in the industry," he said. "Not only do they chronically underperform their averages, they charge us for the privilege."

Fabian came up with the lemon list because so much media attention is paid to the best-performing mutual funds, while the worst are ignored. Of course, he also writes a newsletter, Fabian Premium Investment Resource, which tracks the mutual fund industry, and it doesn't hurt to stir up the investment community.

Nevertheless, Fabian makes a good point: Investors should keep track of the mutual funds they own, and they shouldn't feel locked in by the "buy and hold" philosophy.

"It's OK to sell," Fabian said. "Being a little bit more pro-active can yield some great results."

Ed Foster, Fabian Investment Resources' director of research, spearheaded the lemon list effort, reviewing about 3,000 mutual funds.

Instead of comparing the performances of the funds with the Standard & Poor's 500 stock index, Foster compares them with their peer group.

A fund had to meet two criteria to make the list: trail its peer-group average by 25 percent in one-year performance, and trail the peer-group average in three- and five-year performance.

Smith Barney Premier Total Return made the list because it hasn't kept pace with other growth and income funds. These fund categories returned 40.84 percent on average last year, 28.41 percent over three years and 19.49 percent over five years.

Premier returned 28.68 percent last year, 22.70 percent on average over three years and 16.54 percent over the past five years. It also charges a 5 percent sales fee when an investor liquidates shares, which Foster sees as excessive.

"That is just not keeping up," Foster said. "I would not be happy having a client of mine in the fund."

He had the same complaint about Ivy Growth Fund, which returned 31.54 percent, and T. Rowe Price Associate Inc.'s Capital Appreciation Fund, because both lagged behind their peer groups.

Price's Capital Appreciation returned 23.35 percent last year, yet Foster complained that about 30 percent of the fund's money is invested in convertible bonds and cash. "Right there that tells me they are not going to keep up with the benchmark," he said. "This is a growth fund, this is not a balanced fund."

Fabian has taken some heat for the lemon list.

He said a broker called him and "read me the riot act" about Smith Barney Premier because Fabian didn't take into account the fund's low risk. In fact, Morningstar, the Chicago-based company that tracks the mutual fund industry, gives Premier and Price Capital Appreciation high marks, saying investors stand to benefit from them when the market falls.

Yet, Fabian and Foster would dump the funds from their portfolios. They say too many investors are satisfied if their mutual fund returns 15 percent, even in a surging stock market.

Investors are tougher on car dealers than they are on portfolio managers, he said. They spend months shopping to save $500 when purchasing a car, but are quick to shell out thousands to buy a stock or a mutual fund after getting a tip at a cocktail party.

"It just blows me away," Foster said. "The whole key to make sure that when you are looking at funds, you keep up with them. Don't just buy them and put them under your mattress and think that you are going to do great the rest of your life."

Fabian plans to announce a lemon list every quarter. "There is a ton of junk out there, and there is a time to sell some funds," he said.

Pub Date: 5/17/98

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