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Two Hot Topics, Two Woeful Funds

A climate-change fizzle and an emerging-markets flop.

Gregg Wolper, 07/28/2010

Sometimes, funds created to capitalize on the public's fascination with a particular topic or trend succeed in catching a wave. They provide eye-catching returns for a year or two before they disappoint. Others, though, disappoint right from the start--and continue to do so.

DWS Climate Change WRMAX seemed like a gimmicky idea to begin with. When its advisor staged odd marketing events--such as having snowboarders perform in Beverly Hills and building a replica Amazon jungle near Wall Street--it advanced the notion that this fund was not for serious investors. Even so, it could have succeeded, at least for a while. But it hasn't. Conceived when stock markets were riding high, the fund came out in September 2007, just as the markets were about to stage an epic collapse.

Unfortunately for its shareholders, the fund, which is available only through advisors, didn't merely suffer as badly in the bear market as everyone else. It did worse. From the beginning of the bear market in October 2007 through its end in March 2009, the fund plunged about 61%--5 percentage points more than the world-stock category average. Many funds that had especially severe losses during the crash at least bounced back far more strongly than their peers when the markets rallied from March 2009 to late April 2010. Not this one. DWS Climate Change managed to underperform in both the bear market and the rally. From March 10, 2009, through April 26, 2010, it gained 17 percentage points less than the world-stock category average.

How has it fared since then? Quite well, in relative terms, for the past month or so. But for the year to date through July 23, its return is among the very worst in the category--in the bottom percentile. PAGEBREAK

Beyond the Rankings
This fund's terrible performance in its first three years isn't the only reason to steer clear. The concept itself isn't compelling. A climate-change theme might seem in tune with the times, but what does it actually mean when it comes to the hard work of filling a portfolio? According to the fund's most recent annual report, it invests in companies "involved in both the mitigation of, and adaptation to, climate change." The report classifies stocks as being in one of three areas: clean technology, energy efficiency, or adaptation.

Those rather loose terms allow for a broad, and not particularly focused, portfolio. Besides the expected, such as firms that provide solar or wind power, the portfolio's top 25 features a wide variety of other companies, including fertilizer giant Yara International YARIY, East Japan Railway EJPRY, and General Electric GE. Yes, one can see how those might fit, one way or another, into a climate-change strategy. But one can also see each landing in portfolios capturing very different themes. It's hard to see a real purpose to this sprawling portfolio, or have confidence that it will necessarily outperform even if people around the world become more aware of climate change.

Another unappealing trait: This portfolio carries quite a steep fee. The fund's expense ratio of 1.75% for the A shares is well above the median for broker-sold world-stock funds.

Behind this discouraging portrait, though, lies some good news. Despite the marketing blitz, very few of you bought this fund. It had a slow start gathering assets, briefly topped the $100 million mark for a few months in the summer of 2008, and now has just $45 million in its coffers. The advisors created a fake jungle. You ignored it. Good for you.

Not Gimmicky, Just Bad
By contrast, the emerging-markets arena does have merit. But not every fund in the field stands up to examination. One example is the woeful ING Emerging Countries NECAX. Among the many problems with this fund are its frequent management changes. The latest shift occurred last week, when the three managers who had been running it were replaced by three others. (Actually, one member of the now-former team already had departed in April.) At least one of the incoming managers had been part of a somewhat different team that ran the fund for a stretch in the past decade.

Multiple manager changes are usually a sign that things are not going well. That's certainly the case here. The last time Morningstar covered this fund, in April 2004, the analyst (me) concluded the report this way: "Unimpressive performance at a steep price is not a combination that will turn many heads. This fund has much work to do." Six years later, that conclusion still holds.

Put bluntly, this fund's performance has been disastrous. It landed in the bottom half of the diversified emerging-markets category in every single calendar year of the past decade. For the year to date it lags roughly two thirds of that group. Its trailing five-year return ranks among the bottom 2 percent and lags the category average by nearly 8 percentage points. As for the steep price mentioned in 2004, well, that still applies, too. The fund's expense ratio for 2009 was 2.04%. For the first six months of fiscal 2010 it dipped, but only a bit, to 1.91%.

The fund's one positive point? It has had milder volatility than other funds in its group. Other than that, it's hard to find anything good to say about this broker-sold fund. Why it still has more than $140 million in assets is a mystery. The advice in our November 2003 review of this fund still applies today: "Stay far, far away from ING Emerging Countries."

Gregg Wolper is a senior analyst with Morningstar.

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