New ideas aren't necessarily good ones

Your Funds

Dollars & Sense

September 09, 2001|By CHARLES JAFFE

In the 1960s, Charles Steadman decided to open a fund that invested in companies that planned to profit from developing and farming the bottom of the sea.

The ocean seemed to be the new frontier, and Steadman Oceanographic and its investors would be positioned to profit when it was won.

It didn't work out that way. The fund was a dud from the beginning. Eventually, it was renamed Steadman Technology and Growth, and it created a legacy as arguably the worst fund in history (losing more than 90 percent of its value during a stretch when the average fund increased more than 10-fold).

The fund still exists today, merged into the miserable Ameritor funds (average year-to-date loss for the two Ameritors is 50 percent, average expense ratio is 8.5 percent), which is the only thing that makes it different from almost every other stupid idea to pop up in the history of the fund business.

Thankfully, two of the dumbest ideas to come along during the bull market now appear to be just about stamped out of existence, namely Internet funds and "community intelligence" funds.

The announcement that will fold its Community Intelligence fund, mere weeks after OpenFund announced its intention to liquidate appears to close the book on the chat-room-supported genre of funds.

Internet funds have been vaporizing - or reshaping themselves into broader technology sector funds - at a clip almost as fast as they were opened during the boom year of 1999, a 12-month period when it seemed like every new fund was aiming for nothing-but-Net.

Good riddance to all.

But the demise of these funds holds a good lesson for ordinary investors: New ideas aren't necessarily good ones.

While new mutual funds tend to perform well at first, the ones that do the best long-term tend to be those grounded in pretty basic principles.

Spot the right kind of value or growth, invest there.

The ones that fail are the ones that delve into some new "concept."

Internet funds were (and those that survive still are) investing in a market segment that's too thin to support a fund. The first Internet funds invested in any company with a decent Web site, in spite of the fact that the Gaps and Home Depots of the world hardly qualified as Internet stocks.

The "pure-play" Internet funds - and closed one of them, too - were betting on a sliver of the technology business.

It was great when it worked, but it has fallen as fast as a Ponzi scheme with the market downturn, which is why so many firms are abandoning the Internet ship.

The idea behind community intelligence funds was that the chat-room community of investors who supported the fund would also watch the manager trade, offer suggestions, seek out the next great opportunity, and more.

In a world where the little investor has access to almost as much information as the pros, this seemed like a good idea.

But if the pros were lagging behind the index funds, there was little reason to believe that less knowledgeable amateurs would do better.

Stockjungle Community Intelligence and OpenFund both did well until the market downturn, at which point they raced the Internet funds for who could reach the bottom of the charts fastest.

They weren't alone as bad ideas for new funds.

Market-neutral funds are designed to be 50 percent long (betting on stocks to go up) and 50 percent short (looking to profit when stocks decline). It's a strategy that's worked well for hedge funds, and that was supposed to make for good funds when introduced a few years back.

Instead, the market has been anything but neutral for these funds. They have been losers, which just goes to show that it's stock-picking ability, more than structure, that counts in building a winning fund.

In fact, the fund industry has had no shortage of bad ideas over the years. The trouble is that no one but those who got burned actually remembers what happened, and a new class of suckers is born every minute.

Keep that in mind when the market starts to recover. The new "new thing" will be out there, and it will sound great, like a sure-fire way to recover from your troubles during the downturn.

In the end, however, it will be the "old things" that lay the foundation for a long, happy financial life.

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