Few could have guessed that these losses were coming.
December finished on a note of optimism, but January was a return to the markets grinding lower amid grim economic news. A tidal wave of layoffs has everyone talking about depression, and we've gotten more losses in the mutual fund world.
Today, I'll look at some of the funds with the most surprising losses over the 12 months ended in January. I'll skip over high-risk, high-cost funds where losses really aren't a surprise. ProFunds UltraLatin America
1. Helios Select Intermediate Bond
2. Helios Select Short/Term Bond
3. Helios Select High Income
These are the funds formerly known as Regions. They got burned by subprime and debt from banks and other financial issuers. Before last year, cases of a bond fund losing more than half its value were extremely rare. But their returns show just how brutal a combination of a bad bet, vanishing liquidity, and heavy redemptions can be. In July 2008, management of the funds switched to Hyperion Brookfield from Regions, but the funds are still suffering. Select Intermediate lost 15% just in January. Ninety-nine times out of 100, panicking is the worst thing that you can do. But in this case, panicking and redeeming at any price was the right thing to do because redemptions and sickly portfolios put these funds in a nasty downward spiral.
4. Touchstone JSAM Institutional Value
5. Touchstone Large Cap Value
In the 2000-2002 bear market, value held up so well that some investors misinterpreted the results and thought that value was a safe place to be in bear markets and recessions. Yes, it was that time, but historically value can be as treacherous as growth. Combine that with a focused portfolio and you have the potential for a rough ride. Yes, this fund's losses due to extreme exposure to housing and subprime aren't likely to be repeated at most value or concentrated funds, but it is sobering. Three years ago this would have seemed like a normal concentrated fund. So, the lesson is that value funds have big downsides, too, and with high-risk strategies such as focused funds, it's important to only go with the very best managers.
6. Oppenheimer Champion Income
This high-yield fund's losses really make me wince because so many people owned the fund. The gist of it is that the managers tried to make a killing in mortgages by scooping them up at depressed prices in January 2008. Not only was that a really bad bet, but it was made much worse by the use of tremendous leverage. Eric points out that it wasn't easy for shareholders to see that their fund had just become much more risky. The first lesson is that leverage kills. The second is that chasing yield by buying a fund with a big payout is a bad idea. Instead, look for a diversified fund run by the best managers that you can find in a low-cost vehicle where management doesn't need to take big risks to stay competitive.
7. Alpine International Real Estate
Many of the analyses we wrote of this fund included the word "aggressive," and they also discussed the fund's emerging-markets bet. But I still feel sympathy for those who owned the fund and never thought that it could lose as much as it did. Indeed, it rarely had any losses in past years. The combination of an aggressive approach and a big bet on emerging markets really does tell the story though. Most global real estate funds focus on developed-markets real estate, but this fund had nearly half its assets in emerging markets. Put another way, this fund combined the two trendiest, most overheated investment stories in the world, and investors should have been wary in 2007. The lesson is that if you consider buying because of huge recent returns, you are playing with fire. At the least, take a look to see what risks lie beneath.
8. Fidelity Select Home Finance
OK, maybe these kinds of losses in a fund with a very narrow sector focus aren't shocking. With hindsight, it isn't surprising at all, because many subprime lenders inhabited this space. But this was once a multi-billion-dollar fund that for a long time had the best record of any in the 1990s. The reason was simple. Small banks and thrifts were crushed in 1989 and 1990, so this fund rode their dramatic rebound to great heights, and many investors took that as a sign that there was something remarkable about the fund's strategy or the manager who was behind it. The manager was good but not that good. The lesson is that these narrow funds aren't much more than a number on a roulette wheel.
Russell Kinnel is director of mutual fund research with Morningstar.