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Top 10 Nonsense Funds of the '90s

The most recent decade hasn't cornered the market on dumb fund launches.

John Rekenthaler, 01/08/2010

Mr. Culloton threw down the gauntlet.

In submitting his list of the Dumbest Fund Launches of the 2000s, Dan said that I couldn't come up with an equally silly list from the 1990s. I understand why he was cocky; after all, his was the decade of Britney, Paris, and the reality TV. And he did indeed assemble an impressive collection feculence. GenonomicsFund.com. Thrasher Funds Gendex. Congressional Effect Fund.

Congratulations, Dan. I dub thee the Duke of Dreck.

But I am not entirely unarmed. In 20 years, my son will repeat his father's very words by telling his children how his generation from the 1990s was sober, intelligent, and responsible, unlike the current generation. And he will be wrong, just as his father was. The '90s were putrid, Dan. I'm here to show you why.

Reason #10: Shearson 1990s
Debuting in February 1990, this visionary fund promised to participate in the decade's upcoming trends, which carried Disneylike names such as Age of Peaceful Existence and Focus on Environment. Unlike Walt's attractions, however, this fund was built for the quick buck, and when its performance got off to a slow start, management quickly bailed. The Fund For The Decade lasted . until 1993. Shearson didn't fare much better.

The '90s excelled at long-term promises and short-term mind sets. A few years later, Excelsior launched three funds entitled Aging of America, Communications and Equipment, and Global Competitors. But America didn't age much during the lifetime of these concept funds, which were shut down far before the decade ended. Then there was Mentor Perpetual International. It lived for 21 months.

Reason #9: IPO Plus Aftermarket IPOSX
This particular high concept was notable because it had the full support of academic literature. A bevy of studies had demonstrated without a doubt that in the first year or two after their initial public offerings, newly minted stocks performed much differently than the rest of the market. Worse differently. That's right, this fund targets the highest-risk, lowest-return segment of the entire stock market.

And it has the performance to prove it. The fund roared out of the gate in 1999 with a 115% gain, which it promptly squandered with back-to-back annual losses of greater than 40%. In the nearly 11 years since inception, its performance is negative, including an eyepopping trailing average annual decline of -9.5%. Annual expenses of 2.5% round out the tale.

Reason #8: Alliance Short-Term Multi Market Income B
This was the fund that launched 1,000 Hawaiian vacations. Alliance pioneered the world's most confusing mutual fund category, a bewildering stew of long and short currency positions that somehow, miraculously, featured stable NAVs and yields that were comfortably higher than CD rates, even after the fund paid the eyepoppingly high expenses that were required to fund all those broker sales contests.

What Alliance never said, and what no buyer ever understood, was that the entire edifice was based on the assumption that yields on European currencies would converge. The fund went long on high-yield currencies such as the lira, and short on (of course) the deutsche mark. George Soros took the other side of that trade and pocketed more than a billion dollars in a few days in September 1992 when the currencies sharply diverged. This fund, on the other hand, took a beating and expired two years later ...

... Thereby providing a new definition of the sucker in the room: The person who purchases a mutual fund that bets against the world's leading hedge-fund manager.

Reason #7: Alliance North American Government Income
In the mid-1990s, Alliance had a problem. It had jeopardized its investor and broker relationships by promoting a fund that had blown up during the 1992 Exchange-Rate Mechanism Currency Crisis. How to restore their confidence? The answer was obvious. Sell them another fund that fudged its investment details, paid a high yield that was accompanied by a promise of safety, and which was vulnerable to a currency crisis.

Presto, the North American Government Income Fund was born. Now, you might wonder how an "American Government Income" fund could distribute such a lofty yield, particularly when saddled with Alliance's then-standard high expenses. The answer, of course, is that Mexico lies in North America--and the 25% stake of the fund that was placed into Mexican securities paid very well indeed.

Better yet, Alliance discovered that Argentina was part of North America, and put 18% of the fund into Argentinian securities. (See, this is why Wall Street research is cheap at the price, because who outside of Manhattan would ever have known that about Argentina?) This intriguing tactic of peso diversification struck an iceberg in 1998, when Mexico and Argentina each devalued their currencies, and the fund sank shortly thereafter, along with Alliance's fortunes.

Reason #6: Munder Internet MNNAX
That's right, Dan, the Nineties invented the Internet (fund). This fund and its compatriot Kinetics Internet KINAX debuted way back in 1996, when Netscape was giving Microsoft yet another great product to, ahem, enhance. Predictably, funds that were so narrowly defined and investing in emerging technologies attracted nothing but giggles during their early days, when they turned pretty profits. Equally predictably, once they were taken seriously and flooded with money, they cratered. Munder Internet entered the Oughts with $2.6 billion in assets. It then fell 54%, 48%, and 45%, respectively, over the next three years...

...Thereby making Munder Internet the spiritual leader of today's sector ETFs. The narrower and more volatile the sector, the less likely that investors are to use the fund correctly. Munder Internet actually carries a respectable, 3-star rating today given its good recent performance. However, it holds only $260 million in assets--one-tenth of its size a decade ago. Expect sector ETFs to show a similar pattern. Sometimes, those funds will look mighty smart. But only rarely when they have money. Munder Internet and its ilk were born to be abused.

Reason #5: Keystone Texas Tax-Free
With this fund, Texans could invest in municipal bonds and be fully sheltered from paying state income tax. That's worth a celebration, no? Well . no. See, Texas doesn't actually have a state income tax, so every municipal bond, no matter what its state of origin, offers income that is fully sheltered from the Texas state income tax. But only with this fund could you get extra risk and lower return by limiting the investment manager's geographic flexibility.

OK, not only this fund. A slew of Texas municipal bond funds jammed the SEC filings during the mid-1990s, as other fund companies rushed to offer this exclusive benefit. This was far from the first or last time that the fund industry would launch funds that were devoid of investment merit, but it was certainly among the most obvious of occasions.

Reason #4: Templeton Vietnam Opportunities Fund
Fund providers are always looking for a jump on the competition. So sure enough, somebody was bound to hop on the U.S. decision in late 1994 to lift its trade and investment embargo on Vietnam. That the first somebody (there were several others shortly thereafter) was the highly respected Templeton organization, however, was quite the surprise. Predictably, this closed-end fund sat in cash awaiting Vietnam to develop an actual stock market, which predictably did not occur immediately with U.S. easing.

Bad went to worse when the fund switched its mandate from Vietnam only to South East Asia in general, and invested in Thailand near that market's several-year top. This meant that the fund had held cash when everything was rising, then had invested shortly before everything around it was falling. (Sir John Templeton was surely unamused.) After its Thai stocks got spanked, the fund was sued by its investors for breach of fiduciary duty, and eventually settled the case by returning its assets to investors--i.e., by liquidating.

This was a particularly gruesome case, but the '90s featured dozens of similar tales. Besides the Internet funds (started when there were few pure publicly traded Internet companies) and the Vietnam funds, the decade witnessed a rash of China and Russia launches. Few of these funds survived the next decade while posting competitive returns, and fewer still made money for their investors.

Reason #3: StockCars Stock Index SCARX
I'll admit up front this isn't a terrible investment; indeed, it's pretty much just another blue-chip stock fund with an admittedly steep expense ratio of 1.50%. It sure is loony, however. The fund invests in the "StockCar Stocks Index," which is a listing of all the companies that either sponsor or profit from NASCAR's Sprint Cup series. The idea, I guess, is to buy birthday shares for a friend who is a NASCAR fanatic. Or something like that.

The Golf Associated Fund came out shortly thereafter. Unlike its StockCars rival, that fund didn't buy any advertisers, but instead purchased only those companies that served the golf industry directly. Which has me thinking--why not an amalgam of the two funds? Let's create a fund that indexes the advertisers who are affiliated with the golf tour. Come to think of it, not just the tour overall, but the dominant brand on the tour, the greatest golfer in history. That's right: the Tiger Woods Advertiser Index Fund. It will feature a compact, focused portfolio.

Reason #2: Herzfeld Caribbean Basin Fund CUBA
Sure, the Templeton organization was a decade too early with its Vietnam Opportunities Fund. But when it comes to being mistimed and misguided, nobody can touch Herzfeld Caribbean Basin. The fund was created in 1994 to profit from the opportunities that would (allegedly) occur when the U.S. removed its embargo on Cuban trade, whenever that might be. Note that the Templeton fund got in after the Vietnam embargo ended and was still a decade too early. This fund was born 15 years ago and its country's embargo has yet to be lifted. That means it will be wrong by at least a quarter century.

Bewilderingly, early investors were so taken with this fund that they bid it up to a 30% premium over net asset value. It's hard to know which excited them more, the fund's 3% annual expense ratio or its lack of investment opportunities. Perhaps it was that most enticing of tickers, CUBA. At any rate, as with the StockCars Index, the fund has turned out alright because rather than do anything Cubalike, it's invested instead in solid multinationals like top holding Freeport-McMoran Copper FCX. Solid in practice, but for a McMoron in theory.

Reason #1: AIM Dent Demographic Trends
If Shearson 1990s ushered in the Decade of the Dumb, then AIM Dent Demographic Trends ushered it out. If you like the idea of Stephen Covey picking stocks, then you would have loved this fund. Harry Dent was a motivational speaker of the 1990s who made stock brokers feel good about putting their clients into stocks by selling them on a story of demographic inevitability. According to Dent, the fact that the U.S. baby boomers would be entering their peak savings years in the 2000s made it inevitable that the Oughts would be a boom time for stocks.

As science went, Dent's thesis landed just this side of demonstrating that the earth is flat--which is to be expected from motivational speakers, of course--you don't hire them for the accuracy of their research. Except that AIM did. With predictable results. The fund gathered several hundred million in assets almost instantly due to Dent's skill in telling his story, trailed the S&P 500 in five out of six years (generally by large margins), and folded into the night with a fraction of its original asset base.

With its mid-1999 launch, the fund served as the coda for the Nonsense of the '90s. In wrapping hope in the skin of science, and preaching that the trees would indeed grow to the sky, AIM Dent Demographics Trend perfectly captured the spirit of its times--an era that would see 11 technology funds launched in the last month of the millennium alone. The Nasdaq was at 5,000. There was no limit to how high we could fly.

That was the '90s, Dan. That was the legacy that we left you. Do you still think your generation was dumber?

John Reckenthaler, CFA, John Rekenthaler is vice president of research for Morningstar.

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