Dead funds can offer good advice from grave

Your Funds

December 26, 2006|By Charles Jaffe | Charles Jaffe,Marketwatch

Mutual funds are not people. Their death does not diminish mankind.

Some 900-plus funds were liquidated or merged out of existence in 2006, down about 25 percent from 2005 and the lowest extinction level in several years. While no one truly mourns a lost fund, investors should not ignore for whom the bell tolls.

As they shuffled off this mortal coil, some of these funds created a legacy that investors can learn from. With that in mind - and in the spirit of year-end retrospectives about famous people who died in the past 12 months - investors should pay their due respects to the noteworthy mutual funds that passed in 2006.

Among the "dear departed":

Matterhorn Growth

Of all mutual funds battered by Black Monday in October 1987, this fund suffered the most. It lost more than half of its value the month the market cratered, and was off more than 40 percent for the year. Some observers said the fund never really recovered, but the real problem was horrible stock-picking, rather than one bad month. Matterhorn Growth had 10 percent of its assets in Enron when that company imploded.

Over the past decade, the fund was up about 2 percent annualized. So while people liked to think of this fund as a case of being in the wrong place when the market got hammered, what it really proved is that, for some funds, the market is the wrong place at all times.


This small, Houston-based nondiversified fund opened in 2003 and never had much performance to speak of, but it leaves a strong reminder of why investors should read the paperwork a fund sends them.

In late June, Pebblebrook's independent registered public accounting firm wrote shareholders and directors, and summed up its findings by saying, "Control procedures were not in place to ensure compliance with regulatory matters."

The company's attached response - and I could not make this up -- said that Pebblebrook management "believed it had control procedures in place to ensure compliance with regulatory matters. Management deluded itself."

If management claims to be delusional - especially on issues such as safeguarding securities - investors should run away. Pebblebrook's management was sane enough to recognize that the best response was to pull the plug.

Phoenix Nifty Fifty

There's nothing nifty about a fund stuck in the bottom 10 percent of its large-cap peer- group for the one-, three-, five and 10-year periods, with an annualized gain of less than 0.5 percent over the past decade. It's being merged into Phoenix Capital Growth, a fund that's been nearly as bad; despite new management, shareholders might have preferred liquidation to being undead, and living on like a zombie inside a new skin.

Janus Olympus

When Claire Young, manager of the lagging Olympus fund, left Janus, management handed the reins of the $2.2 billion fund to Ron Sachs, manager of the much-stronger Janus Orion fund. Rather than keeping a great brand name - despite recent troubles, Olympus had an annualized return of nearly 11 percent over its lifetime - and splitting Sachs' attention between funds, Janus did the right thing and folded Olympus into Orion.

More funds should die a good death like this.

Managers 20

Affiliated Managers Group hired Oak Associates to run this fund in 2000, trying to profit from Oak's 20 best ideas.

Unfortunately, the bull market was over and Oak - which runs its own family of laggards - hit the skids. By focusing on a few stocks, mostly bad ones, Managers 20 got killed. The fund had an average loss of more than 20 percent per year for the last six years; worse yet, Affiliated Managers Group - which had promised to change sub-advisers if performance was less than expected - did nothing until finally euthanizing the fund.

That's what happens when bad management is mixed with spineless oversight.

The Rational Investor

Started by Jamie Dlugosch of the Rational Investor newsletter, this fund proved that newsletter strategies don't always make for a good fund. Rational Investor lasted less than a year, gaining just over 2 percent, and showing that investors who love a newsletter sometimes are better off following the written advice than investing in a fund trying to mimic the strategy.

Leonetti Balanced

This small fund's history mimicked life for many fund investors. Started in the mid-1990s, the fund enjoyed the ride up through the end of the bull market, only to give back all of its gains from the time the market peaked in 2000 through the end of 2003.

By the time it started on a lukewarm recovery, neither management nor shareholders seemed to care.

Grand Prix

Manager Robert Zuccaro and his fund were bull market superstars, Zuccaro for forecasting that the Dow Jones industrial average would hit 30,000 by 2008, and the fund for back-to-back triple-digit gains (112 and 148 percent in 1998 and '99 respectively).

But when reality and the bear market set in, Grand Prix lost 33 percent in 2000, 56 percent in '01, and 47 percent in '02, completely eroding those large gains. There were smaller losses in '04 and '05. Zuccaro started 2005 telling shareholders that the Dow could still reach 30,000 by 2009, and ended it by filing the paperwork to wave the checkered flag on Grand Prix and its sister Grand Prix Mid-Cap. The fund's former investors now have a much better chance of winning life's financial race.

Charles Jaffe is senior columnist for MarketWatch. He also can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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