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Dumb and Dumber: The Worst Fund Launches of the 2000s

If you thought some bad ideas were mooted in the '90s, look at this.

Dan Culloton, 01/08/2010

Morningstar analysts have been having a little debate lately. When it comes to dumb fund launches, which decade was the worst: the '90s or the '00s?

We disagree along generational lines. The old guard, led by our vice president of research John Rekenthaler, contends that fund companies have yet to retest the low standards for mercenary fund rollouts set in the last decade of the previous century. Analysts of more recent vintage, including me, find it hard to imagine a time of greater cupidity than the decade that's about to close out.

When it comes to fund analysis, John has forgotten more about mutual funds than many industry watchers know. But he's wrong on this one. The double oughts set new records for dubious, trend-chasing new funds.

The Leisure-Suit Era
The '00s had the leisure suits of fund launches. The tech and growth stock bubble inflated in the '90s, and fund companies had launched Internet, tech, and biotech funds before. But the mania reached its apogee in 2000. Never were so many specialized funds launched at so wrong a time. Most of those mutual funds now lie piled in history's drawers like snapshots of you in gaudy, flared pants and matching waistcoats with lapels as big as F-15 wings. Every now and then someone excavates one and you have to say, "Hey, everyone dressed like that. It seemed groovy at the time." I bet a lot of fund company executives are saying something similar about their tech funds. Few lived on, but the memory of some will endure in infamy.

Hotshot venture capitalist and author Steve Harmon started Zero Gravity Internet, named after his book, in May 2000 but left the fund five months later. Ultimately, it closed at the end of March 2001, down nearly 60% from inception.

How do you exploit two hot trends--in this case, the Internet and mapping of the human genome? Easy. Slap a .com suffix on a biotech fund--like GenomicsFund.com did--and you can have it both ways. Months after its March 2000 launch, the fund issued a news release touting its debut as a top performer. Years of abysmal results and management, strategy, and name changes ensued. The fund became a small-cap fund and finally died with a whimper and without a news release earlier this year.

B2B funds sprouted because companies using the Web to facilitate business between businesses (thus B2B) were purportedly going to rule the New Economy. Amerindo Internet B2B, however, was merged away three years after its May 2000 launch when managers Alberto Vilar and Gary Tanaka were arrested for stealing from their clients. The fund lost a cumulative 70%, and Vilar and Tanaka were convicted of money laundering and fraud.

The most hubristic launch of that era, however, was Merrill Lynch Internet Strategies'. Nine days before the Nasdaq's peak, the firm held a pep rally featuring the then-unrepentant Net stock tout Henry Blodget and fund manager Paul Meeks, who howled "Let's get ready to rumble!" like boxing-ring announcer Michael Buffer. Internet Strategies gathered more than $1 billion in a subscription period and then imploded.

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