Sureal manager, others merit Annual Lump of Coal Awards

Your Funds

Your Money

December 19, 2004|By CHARLES JAFFE

I'm not Santa Claus, but I've made my list and checked it twice.

That's why it's time for the ninth annual Lump of Coal Awards, where today and next week, I'll drop an inky chunk of carbon on the bad boys and girls of the fund world, the ones who deserve nothing more than fossil fuel in their Christmas stocking.

It takes more than wretched performance or mere involvement in a scandal to earn a lignite trophy this year. While those conditions earn close scrutiny, Lumps of Coal recognize managers, executives, firms and industry watchdogs for attitude, performance, action or behavior that is offensive, duplicitous, disingenuous, reprehensible or just plain stupid.

The 2004 Lump of Coal Awards go to:

Manager Mario J. Gabelli for reopening the Gabelli ABC fund in March, when 70 percent of the fund's assets were already in cash.

Gabelli ABC specializes in merger and acquisition arbitrage; Gabelli closed the fund to new investors in late 2002 because so few deals were being made that he couldn't put his cash to work.

Even if Gabelli anticipated a pickup in mergers, bringing in new cash before he could put existing dollars to work was bad. While Gabelli's firm stood to make more money in management fees, shareholders were being watered down even more, to where nearly 80 percent of the fund is now in cash.

ING, for holding a "going out for business" sale.

Weeks ago, ING started hyping on its Web site that it would close its small- and mid-cap value funds to new investors on Dec. 31. ING is encouraging investors to rush in - as if this is the last chance to catch the train to Prosperity - which could bloat the funds and diminish future performance.

Morningstar Inc., for talking out of both sides of its mouth.

Late in September, Morningstar acknowledged that the Securities and Exchange Commission was investigating incorrect return data published by Morningstar for nine days in March concerning the tiny Rock Canyon Top Flight Fund. Morningstar accepted responsibility, fixed the error and apologized for the whole thing.

But days later, in e-mail hyping its premium membership service, Morningstar officials wrote: "Some vested interests would like you to believe that data is a commodity. But as you know, data can be manipulated. Some providers can be sloppy with their data, too."

You don't fess up to blunders one day and talk smack about the competition the next. That's just wrong.

The Securities and Exchange Commission, for pursuing the flimsy case against Morningstar in the first place.

Tarnishing the firm's reputation over nine days' worth of sloppy data - provided by the fund's transfer agent - feels like a payback for the heat Morningstar has put on regulators for mediocre oversight.

Over the days that Morningstar's numbers were wrong, no new money was invested in the fund.

This was a touch foul, and regulators should have spent their time pursuing real crimes. They might have started by figuring out who allowed a fund to go by the suggestively misleading name of Top Flight Fund in the first place.

Fund manager Chris Lahiji, for a surreal view of his own performance.

Lahiji is the 20-year-old, self-promoting whiz kid who attracted some attention and followers by posting huge gains running an imaginary investment portfolio online. Late in 2003, he took those stock-picking skills to the Frontier Equity Fund - one of the worst mutual funds in history - vowing to prove that his system works in the real world.

Instead, the fund is off more than 17 percent this year, lagging behind its small-cap blend peer group by 32 points.

The site touts the 230-plus percent gain of the hypothetical fund and virtually ignores Frontier Equity entirely. It links to (where Lahiji is president), promising you'll "learn from successful fund manager Chris Lahiji."

The advice may be worth it, provided you pay for it with hypothetical cash.

The board at Transamerica, for putting shareholders' interests second.

In February, Transamerica fired Warren J. Isabelle as sub-adviser for the IDEX Isabelle Small Cap fund, the firm's top performer in 2003, and replaced him with insiders. The move cut the fund's fees but forced a change in the fund's name and objective, and left investors wondering for whom Isabelle toils. (Answer: "It's not for thee.") Isabelle was even willing to cut fees.

Investors may have saved pennies, but Transamerica now gets to keep all of the fees on the $430 million fund, rather than sharing them with the guy whose name and performance actually attracted the money in the first place.

Cortina Asset Management for a false start that could leave its new funds dead on arrival.

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