Those awful Steadman funds returning with Ameritor name

Your Funds

Dollars & Sense

April 14, 2002|By CHARLES JAFFE

THE WORLD'S worst mutual funds are about to be reborn. The question is: Who in their right mind would buy funds with records so hideous that they are the poster children for everything that can go wrong in investing?

The Ameritor funds - formerly the Steadman funds - are about to undergo radical changes in the hope of shaking their disgraceful past and attracting new investors. Ironically, the move comes at a time when the industry trend has been to forget the past by closing losers.

The Ameritor funds were created in 1998 from the wreckage of the Steadman funds, which started in the 1930s and prospered into the 1960s. It was then that Charles Steadman took over management of the family firm.

Steadman had his own ideas for managing money, ranging from a fund hoping to profit from companies that would mine and build communities on the bottom of the sea, to funds that invested in tiny, esoteric stocks. He regularly fought with securities regulators, and seldom sent required documents such as annual reports to shareholders in a timely fashion.

When challenged by the Securities and Exchange Commission over these types of actions, Steadman raised the funds' expenses to pay legal bills. When the fights faded, he never reduced the fees, which eventually left the funds with expense ratios ranging from 6 percent to 25 percent.

In the 30 years before Charles Steadman's death in 1997, the average mutual fund was up more than 20-fold. Three of the four Steadman funds were down; all four of his funds - including his lone "winner" - landed among the 10 worst-performing funds over that three-decade period, according to Lipper Inc.

Many shareholders just gave up. By early 1997, 40 percent of the firm's accounts had been "abandoned." By not sending statements unless there was account activity - meaning redemptions, since no one was buying these losers - Steadman lost touch with investors. He neglected legal requirements to move accounts to abandoned-property offices run by state governments. The accounts were small ($700 on average), many lost shareholders were presumed dead, and it seemed no one was working too hard to catch a scofflaw firm with just $8 million in assets.

When Steadman died, his daughter and son-in-law reorganized the firm as Ameritor, liquidating two funds and working to get the abandoned accounts problem under control. Expenses remain high - between 6 percent and 9 percent - for the two remaining funds, while assets shrank to $3 million combined.

In spite of that history, Ameritor has filed registration papers with the SEC to sell a new class of shares, has found a new manager, and is becoming a social investment fund with a conservative bent.

Go figure.

Ameritor's new "Shepherd" class of shares is to be run by Paul Dietrich, a consultant who has been working with the firm. Coupled with the Dominion Insight Growth fund, which Dietrich purchased in a separate deal, Ameritor's funds will now be marketed as the Shepherd family of funds.

Technically, however, they remain a share class of the Ameritor funds, which means they can't shake the past when it comes to figuring their track record.

"There is no question these are the old Steadman funds," says Dietrich, of Nye, Parnell & Emerson in Alexandria, Va. "We can't avoid the history, but we hope to convince people to ignore it because it's not the same fund any more. We'll have a fund run in a completely new style, primarily marketed to social conservatives ... and we'll be able to say that as of a specific date, the fund's portfolio and strategy were changed to where current performance is no longer a reflection of the past.

"Hopefully, people will judge us on what we do, not on what someone did who isn't here anymore."

That's a nice thought, but it won't sell at Morningstar, Lipper or the other fund-tracking firms. If the originally registered fund survives, so does its record. And since 10-year performance factors into things such as Morningstar's star ratings, Ameritor/Shepherd will have ugly ratings for years.

As for Ameritor's high expense ratios, Dietrich must attract assets to bring those down to his target of roughly 2 percent. He may be helped by Ameritor's skeleton crew staffing - Steadman's son-in-law is one of two full-timers with his daughter working part-time -but mostly he will need performance.

"If I can turn this around in the next year or two," Dietrich says with a laugh, "I should be up for one of those manager of the year awards."

Maybe so, but anyone whose best business judgment tells them to rebuild the worst franchise in investment history certainly will have a long way to go before he can prove to investors that he can overcome the past.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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