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Yikes ... These Funds Have Been Bludgeoned....

Beware of these portfolio-eating zombie funds that are still around for some reason. 

Russel Kinnel, 10/31/2011

Now this was an October to embrace. For all the scary headlines, the markets surged and many indexes are back in the black.

Sadly, though, some funds don't know that they held a rally. Some are down an impressive amount given that the markets are mostly modestly positive or only slightly negative.

Let's take a look at the funds with the biggest losses for the year to date through last Thursday. Although some of these funds are obscure, there are some broader lessons to be learned. I'll skip over the superleveraged index bets from the likes of ProFunds and Direxion, as there's not much to that story. I have included their rankings from the bottom up starting with the biggest loser at number one.

1. YieldQuest Core Equity YQCEX, negative 56%
YieldQuest has achieved something truly disturbing. The fund family has three funds in different asset classes, and all three have lost more than 40% this year. The other disasters are named 4. YieldQuest Total Return Bond YQTRX and 5. YieldQuest Tax Exempt Bond YQTEX, which are down 44% and 43%, respectively.

A look at their April portfolios doesn't provide a lot of answers. The funds buy lots of exchange-traded funds, closed-end funds, options, and futures, and they trade at a rapid rate, so I'd imagine little of what they had in April is still in their portfolios.

The equity fund shows some short bets against emerging markets and the euro, which should have worked out well. Even the muni fund has some currency bets, which are a strange thing for a muni fund. But the answer may lie instead in some articles on its website in which they warn of the dangers of rising rates. It could be that they made some big bets on interest rates rising and then got burned by the flight to quality that drove down Treasury prices. One way or the other, something weird is happening here.

In any case, I can't recall a time when a fund company had three funds in different asset classes that all had such similar and extreme behavior.

2. Birmiwal Oasis BIRMX, negative 55%
Lesson one: Don't invest in a fund that sounds like a tiki bar. Lesson two: Beware of a fund that has extremely different performance from its peers. That doesn't make it an awful fund, but you should know going in that it's going to have years where it finishes last. This fund has been either first or last in its category for most of its existence. In fact, it finished first among small-blend funds in five of its seven full calendar years. Yet this year's drubbing and a 63% loss in 2008 mean that the fund is way behind the average small-blend fund since its 2003 inception.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.
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