For bad boys and girls: the annual Lump of Coal Awards

Your Funds

Dollars & Sense

December 21, 2003|By CHARLES JAFFE

WITH NEW charges of wrongdoing being fired at the mutual fund industry virtually every day, it might seem like piling on to pick on the business for its ordinary foibles and buffoonery.

That's OK. Let's pile on.

It's the eighth annual Lump of Coal Awards, where today and again next week this column will bestow an inky chunk of carbon to the bad boys and girls of the fund world, the ones who deserve nothing more in their Christmas stocking.

Lumps of Coal are given to managers, executives, industry watchdogs for attitude, performance, action or behavior that is offensive, disingenuous, reprehensible or just plain stupid. It takes more than wretched performance to earn a bituminous bangle and, this year, it takes more than being named in the latest scandal, although all of the scandalized firms are deserving.

Crisis-related Lumps will show up next week. With that in mind, the 2003 Lump of Coal Awards go to:

The FBR Funds, for sweeping an unexplained blow-up under the rug.

In July, FBR Total Return Bond fund lost 19 percent, an astonishing loss for a government bond fund. Apparently, something went horribly awry with the fund's futures and options strategy, but FBR has never said what. And it never will. To make the problem go away, directors voted in October to liquidate the fund.

Credit Suisse Asset Management, for sheer nerve in dealing with its own mistakes.

In February, CSAM acknowledged that the advisory contract for seven Credit Suisse funds was inadvertently allowed to lapse ... in 2000. Without an agreement, Credit Suisse had no authority to act as adviser to the funds, but it kept right on managing the money, collecting more than $10 million in fees to which it, technically, wasn't entitled.

The firm should have given the money back to shareholders just for miserable oversight of something so basic. Instead, Credit Suisse asked shareholders to approve the fees retroactively, and made it clear that the firm would sue its funds to collect if investors balked at paying the price.

Strong Ultra-Short Term Income fund, for mis-direction in advertising.

Early in the year, ads for this fund prominently featured its highly attractive "30-day current yield" of 3.47 percent. The text of the ad noted, however, that the fund is targeted "for your savings goals of one year or longer." That longer-term focus trumps the 30-day picture, especially when the bottom of the ad showed the most recent 12-months of returns ... which were 0.71 percent.

To all fund companies that started advertising year-to-date or one-year performance in 2003, because they know better.

Fidelity and Smith Barney are among the bigger firms that touted short-term numbers in some ads, playing on investors' desire to rebound quickly. But the fund industry has years of proof that today's hot fund could be tomorrow's trouble spot. Armed with that knowledge, there is no excuse for pandering to the public's greed.

ING, for messing up the easy stuff.

In the summer, ING Investments offered to repurchase shares of ING Senior Income A sold between June 30 and July 16. Apparently, the firm lost track of the number of shares in the fund that had been registered with the SEC; when demand for the fund spiked, ING should have "run out" of shares while awaiting registration of new ones. Instead, the firm sold unregistered shares.

UBS, for assuming its shareholders are idiots.

In September, the firm announced that it was folding its UBS Financial Services fund into UBS Value Equity and suggested that one of the big pluses for Financial Services shareholders was that their new fund is more diversified. That would be a valid point, if investors had no clue that they had purchased a sector fund in the first place. It was not good news for investors who bought a fund focused on one industry.

The Securities and Exchange Commission, for its penalty in the IPO stuffing case against the Brazos funds.

The adviser of the Brazos funds, John McStay Investment Counsel, agreed in the summer to a $200,000 fine for loading its funds with shares of hot initial public offerings. The new funds soared, but investors weren't told that the results would be nearly impossible to repeat as the funds grew larger. And, fueled by the hot record, the funds grew huge. Brazos Small Cap alone went from $50,000 to $742 million in three years.

If the SEC had wanted to punish these jokers, it needed to wipe out the track record, or at least give the firm a scarlet letter, a big red X stamped over the affected years in all performance charts. Instead, the agency showed that it pays to cheat in order to build a great track record; the fine for cheating is merely a cost of doing business to build a reputation.

Me - it's my first Lump of Coal - for my worst bit of writing at precisely the wrong time.

Three days before New York Attorney General Eliot Spitzer fired the first howitzer in the current scandals, I wrote a column critical of the industry's disclosure standards. In an otherwise fine column, I included a line that said, "The fund industry has been virtually devoid of scandal through its nearly 80-year history."

Shame on me for publishing that bit of industry rhetoric. You deserved better.

Next week: Scandal-ridden bad guys get their coal ... and more.

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