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Beware! On This Page Lurk 19 of the Scariest Funds

We've traced the phone call, and it's coming from inside your portfolio!

Russel Kinnel, 11/02/2010

Want to scare your nest egg? I've assembled a murderers' row of some of the most menacing mutual funds around. If you're squeamish, stop here, and don't read any further. Chicken ...

The Interest-Rate Shocker!
With interest rates at record lows, funds are particularly vulnerable to a spike in rates. To find out how risky a fund is, check its duration. The rule of thumb on duration says that you multiply the amount that rates rise by the fund's duration to get a rough idea of how much you'd lose when rates rise. So, a typical core bond fund like Vanguard Total Bond Market Index VBMFX has a duration of 4.4 years. If rates rise 200 basis points, you might lose around 9%. This is why author Bill Bernstein is recommending short-term bond funds.

But there are funds that have much greater durations and might have tempted the yield-hungry. The retail fund with the greatest duration is Rydex Government Long Bond 1.2x Strategy Investors RYGBX with hefty 16.9 year duration. The fund is working on a good year, which could be its seventh top-quartile performance in the past 10 years. But the bad years more than make up for the good. The fund lost 31.2% last year, and the fund's 10-year returns are bottom decile. This is an extreme case, but even more widely held long-term funds deserve a close look, so that you can be properly prepared for a rate reversal.

Zombie Funds!
If you see these funds coming down the road, board up your house, and pull out an old transistor radio to listen to reports on the mayhem. Some funds just won't die. Apex Mid Cap Growth BMCGX has lost an annualized 7.24% over the trailing 15 years, and yet somehow it is allowed to live or can't be killed off. How many years do you need to test whether investors should be in the fund? Comstock Capital Value DRCVX has lost an annualized 7%, and Z Seven ZSEVX (sounds like an Ed Wood movie) has lost 6.2% annualized over the past 15 years. Someone give the fund directors a shotgun, so they can snuff out these funds.PAGEBREAK

Terrifying Prices!
Price risk is one of the big risks you run in investing in stocks. If you buy high P/E (other valuation measures work, too) stocks and they miss earnings estimates by even a small amount, look out below. The 2000-02 bear market was all about price risk--the higher the P/E, the bigger the losses. Today, there are three funds with P/Es above 30. There's ProFunds UltraSector Mobile Telecom WCPIX with a P/E of 34. You can see the carnage it's left in its wake by clicking on the performance tab. Note the steep drop off a cliff in the returns chart. Then check out what happened in 2001 and 2002: It lost 42% and then 80% the next year. Next on the list are Dynamic U.S. Growth DWUGX at 32 and Baron Opportunity BIOPX also at 32.

The Vampire Funds!
Some funds of funds layer on the fees, and they can suck the lifeblood out of your portfolio. With low bond yields and potentially GDP growth to come, you need every bit of return you can get. Nosferatu would admire the prospectus net expense ratios of Hatteras Alpha Hedged Strategies ALPHX (3.99%), Flex-funds Strategic Growth FLFGX (2.94%), and ETF Market Opportunity ETFOX (2.04%).

The Taxman Cometh!
If you want to scare your accountant, buy a fund that makes money before taxes but loses money after taxes. We calculate a tax-cost ratio and aftertax return figure that assumes the highest tax rate. The tax-cost ratio tells you how much an investor would have paid out in taxes on an annualized basis, and the aftertax return is the pretax return minus the tax-cost ratio. We calculate aftertax returns as though you held the funds through the period and sold them at the end of it. For our purposes, I'll use the presale figures. Click on the tax tab for a fund to see all the gory details.

Some funds are just meant to be held in tax-sheltered accounts and should never see the light of day in taxable accounts. PIMCO Real Estate Real Return Strategy PRRSX left you paying 7% a year to the taxman over the past five years, so that you just had an annualized 3.7% after taxes. At least you'd have still made something. Even worse is Alpine Dynamic Dividend ADVDX where a 4.75% a year tax bill left you with 3.95% in annualized aftertax losses over the past five years. Metropolitan West AlphaTrak 500 MWATX took a 4.1% tax hit to suffer a 1.33% annualized five-year loss. HSBC Investor Overseas Equity HOEAX lost 1.36% annualized after a 3.87% per year tax bill in the same period. Finally, Forward Strategic Realty KSRAX suffered a blood-curdling 5% five-year loss after a tax-cost ratio of 2.98%.

The Insurmountable Hurdle!
The SEC is apparently taking a closer look at fees to see if there are some that unacceptably high. Here are a few that are murder on your wallet: Embarcadero Absolute Return EFARX 7.62%, Midas Special MISEX 4.11%, Jacob Internet JAMFX 3.64%, and Saratoga Technology & Communications STPAX 3.22%.

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