Gimmick Funds Giving Up the Gimmick

At Morningstar, we are of two minds about gimmicky funds with funny names. When we're in our serious, highly professional mode (i.e., most of the time), we deride them as unnecessary, misleading, or worse. However, on certain occasions--say, at the end of a long day pondering the intricacies of 12b-1 fees and fair-value-pricing policies--we're secretly grateful for the chance to chuckle over funds that restrict themselves to the water sector or boast the phrase "B2B" in their names.

We may soon have to look elsewhere for entertainment, though. Wacky funds appear to be on the decline. True, hard numbers aren't available--we don't maintain a separate "gimmick" category or label funds accordingly--and a wave of new funds focusing on dividends or principal-protection show that fund marketers haven't lost their initiative. But the trend does seem to be heading away from the odd or unconventional toward the sober and straightforward.

Many examples come from the Internet arena, where plenty of funds created during the bubble years--or worse, just after they ended--have liquidated, merged, or simply exchanged their flashy clothes for gray flannel. One early example of the latter move: In mid-2001, Turner B2B E-Commerce Fund became Turner New Enterprise . Granted, the new name is itself glitzy. But at least it consists of actual words. And the fund broadened its mandate to cover a number of industries, though it still favors tech. More recently, Eaton Vance Information Age  followed suit: It has expanded its range to include growth stocks in a variety of sectors. Accordingly, on Jan.1, 2004, it adopted the buttoned-down moniker Eaton Vance Global Growth.

The trend isn't limited to tech or Internet funds. A fund with one of the weirdest names out there, Morgan Stanley Competitive Edge "Best Ideas", (the quotation marks were actually part of the fund's formal name), decided after several years of lackluster performance to go mainstream. In 2002, it became  Morgan Stanley Global Advantage , and changed its strategy to follow an index-oriented approach rather than relying on the top stock picks of Morgan Stanley analysts. More recently, Van Kampen Worldwide High Income, which invested half its assets in U.S. junk bonds and half in emerging-markets bonds, dumped the U.S. portion of this strategy and became simply  Van Kampen Emerging Markets Income . 

Admittedly, the Van Kampen fund's former strategy wasn't as gimmicky as some. I actually like the idea of traditional multisector-bond funds, which typically invest in three separate areas of the debt market: U.S. government, high-quality foreign government, and U.S. junk. (Too bad most such funds are weak performers or too expensive.) But mixing emerging markets and junk in one fund seemed superfluous--better for investors to own funds that concentrate on one or the other, if that's what they want. And in any case, the fund's performance under that mandate left much to be desired.

One fund that has not changed its ways, but might think seriously about doing so, is  AIM Dent Demographic Trends . The fund loosely follows the precepts of forecaster Harry Dent, but he doesn't actually manage the fund. Its performance has been underwhelming, even taking a strong 2003 into account.

Gimmick funds will never disappear. In a crowded field, some fund firms (their marketers, in particular) will resort to funny names or weird mandates in a bid for attention. And not all funds that seem gimmicky turn out badly, particularly if they're lucky enough to have a talented manager. Several years ago, I wrote a Fund Spy about AllianceBernstein Worldwide Privatization (AWPAX), which has flourished (alas, the manager that provided most of that record is gone and expenses have become far too steep).  WM West Coast Equity (CMNWX) is another whose manager has taken an offbeat mandate and built a solid record. All in all, though, the trend away from odd, tough-to-justify mandates should be applauded.