9-16-13 4:32 PM EDT | Email Article
 

By Chuck Jaffe, MarketWatch

 

In covering the fund industry for a few decades now, I'm still waiting to see an absurd or flawed investment premise become a successful fund.

 

But that doesn't keep investment guys from filing papers on preposterous fund ideas, the most recent coming from Connecticut-based Ark Investment Management, which is planning to open four actively managed exchange-traded funds: Ark Genomics Revolution, Ark Industrial Transformation, Ark Man + Machine and Ark Technology-as-a-Service.

 

To see why the Ark funds are likely to soon join the Mutual Fund Hall of Forgotten Silliness--indeed to recognize why investors should avoid even the most appealing of gimmick funds--we need to examine the new funds and stroll down Memory Lane.

 

We'll have to judge the Ark funds entirely on the strength of a prospectus filed with the Securities and Exchange Commission, because it's impossible from that paperwork to track down anyone at the firm, and searches lead only to a non-functioning website.

 

That said, the genomics theme may feel new, but it's stale; The Genomics Fund--a traditional mutual fund--opened in March of 2000 (right at the peak of the Internet bubble), lost more than half of its value in its first 18 months and was merged out of existence shortly thereafter, having never attracted much money. (For proof that Ark is behind the curve, check this MarketWatch article talking about how top funds see genomics as an investment theme; it's 12 year's old:.)

 

Looking for stocks "relevant to the theme of Man + Machine" is so vague that it's impossible to judge; here's a bet they'll buy Google (GOOG) because it is developing Google Glass, and not because it's the world's leading search company. That's like the nanotech fund that owns General Motors (GM.XX) because the company develops plenty of nanotechnology, but treats the company's automotive business as something of an afterthought.

 

Reading the prospectus for Industrial Transformation, it's clear Ark is looking for dynamic game-changers, which means it's just another aggressive-growth fund. Technology-as-a-Service looks to be a tightly focused niche tech fund, as if the fund industry needed another one of those.

 

The difference between the Ark funds and most ETFs is that the new issues are actively managed, meaning they are not built on an index. That is the next wave in the exchange-traded fund evolution, but it's fairly clear that when firms like T. Rowe Price and Franklin Templeton finally dive headlong into the ETF pool, they will try to make a splash with their superior management skills rather than with gimmicks.

 

It also would be wrong to single out Ark as the only offender, when they are merely the latest. The LocalShares Nashville Area ETF (NASH) , for example, opened earlier this year. It buys companies based in the Tennessee city, but fails to take a lesson from the OOK Large-Cap ETF (which only bought companies based in Oklahoma) or TXF Large-Cap (Texas companies!), which used the same invest-at-home strategy throughout their short, miserable existences.

 

Before that, it was the HealthShares funds, which cut the world of medicine so thinly--think a fund for every disease--that investors ultimately preferred the diversification of an ordinary health-care sector fund.

 

Years ago, it was the StockCar Stocks Index Fund, which opened in 1998 with securities that would profit from Nascar's booming popularity. But just as Google isn't judged by most to be a "man + machine" stock and GM is not a pure nanotech play, the "stock car stocks" mostly had nothing to do with racing, except for sponsoring race cars. Trying to win the race with companies that make laundry detergent and soda pop meant the fund was just a large-cap growth fund with a gimmick; it ran out of gas and folded in 2010.

 

Last year, iShares planned to start a Human Rights Index fund that, despite its noble purpose, was doomed from the start. Funds based on calendar effects, shareholder activism, fads and more have tugged at both the heartstrings and the purse strings, but the story always ends the same.

 

Ultimately, that kind of preordained disaster is precisely what investors want to avoid.

 

Shine a bright light on "concept products" from no-name companies and you'll find that there is not much new under the mutual fund sun; while you could be passing on the next great investment story, you're much more likely passing on the short, inglorious legacy that concept funds typically leave behind.

 

The moral of the story: Wait for gimmicky new issues to develop a quality track record; more often than not, they will fail at the task or die trying and you'll be better off for having been an observer than an investor.

-Chuck Jaffe; 415-439-6400; AskNewswires@dowjones.com

 

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(END) Dow Jones Newswires

09-16-13 1632ET

Copyright (c) 2013 Dow Jones & Company, Inc.
Copyright 2014 MarketWatch
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Morningstar - 2013/9/16 - UPDATE: Surefire candidates for mutual fund hall of silly
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