The Best- and Worst-Performing Funds of 2004

The stock market has been sliding downward this year. Whenever that happens, some fund investors respond by heading to the shrinking group of funds with positive returns. Unfortunately, that can be a dangerous thing to do when the market is under water.

The top performers for the year to date get there because they focus on a narrow slice of the market--not because they're safe investments. Given the choice, I'd rather buy from a list of the worst performers for the year to date. Those figure to be just as volatile, but at least there's a better chance that the underlying assets are cheap.

However, I get reader questions about the funds that have done the best, so I'll take a look at why those funds have done so well in 2004 and how attractive they look now. It's also helpful to look at these narrow funds because it can help you to understand the performance of your more diversified holdings. An investment in these hot sectors might explain relative success this year.

ProFunds Ultra Wireless (WCPIX)
The story is pretty straightforward here. The fund is a leveraged play on wireless stocks. These stocks got destroyed in 2001 and 2002 but have rebounded since then. It seems like these stocks always overdo rallies and sell-offs with equal vigor. This fund has gained 25% so far this year thanks in large part to the fact that top holding  AT&T Wireless  is getting acquired at a generous price by Cingular. The gains this year are great, but I wouldn't touch this fund. It's a leveraged play on a handful of stocks, its expenses are too high for my tastes, and you'd be getting in rather late if you bought now.

 Oppenheimer Real Asset 
I like this fund quite a bit more than ProFunds Ultra Wireless, but you'd have to be a mega-bull on the price of oil to buy in now. This fund is a pure play on the price of commodities. It invests in derivatives that roughly track the Goldman Sachs Commodity Index, which is nearly three quarters energy. Thus, it rises and falls with the price of oil. The fund is up 21% this year because oil is hitting an all-time high. Therein lies the problem. Buying it today means you're betting that oil can go much higher. If you bought a fund that invests in energy stocks, however, you might earn a decent return if oil merely held onto current levels. That's not a great bet in my book, but it beats wagering that oil will go much higher. If you're looking for an inflation hedge, consider  PIMCO Commodity RealReturn Strategy (PCRAX) instead because it tracks a more diversified index.

ProFunds Ultra Energy (ENPIX)
You can insert the word "energy" for "wireless" in my discussion of ProFunds Ultra Wireless without missing much.

 ProFunds UltraShort OTC (USPIX) and  Rydex Venture 100 (RYVNX)
These are funds that are leveraged short plays on the Nasdaq 100. In other words, the more the Nasdaq loses, the better they do. Needless to say, this has been a rough year for the Nasdaq. A lot of big tech stocks posted strong returns last year, so it seems we’re giving back some gains this year. The only thing less appealing than leveraged sector funds is leveraged short funds. Markets generally go up, so you’ll need a lot of luck to make money with these funds.

 INVESCO Energy (FSTEX)
Last September, Morningstar senior analyst Dan McNeela wrote, “Invesco Energy is slumping, but we think it can bounce back.” This fund’s focus on oil services and exploration stocks led it to underperform its peers in 2003, but Dan figured that focus could serve it well if oil prices rebounded. Sure enough, they did--and this fund has performed nicely. Unfortunately, other events have lessened the fund’s appeal. Its expense ratio has shot up, and our opinion of Invesco has fallen as the firm was dragged into the market-timing scandal. It has yet to settle with regulators. In short, this looks like a good time to take profits.

Bringing Up the Rear
Most of the other names at the top of this year's leaders' list are energy funds, so let’s turn around and look at the funds at the bottom of the performance tables. For the most part, this group is just as unappetizing as the top performers.

ProFunds Ultra Semiconductor (SMPIX)
This fund gained 146% in 2003, so anyone foolish enough to buy this year may now be realizing that buying high and selling low isn’t much fun. It’s down 45% in 2004, and that’s not surprising given how much chip stocks roared last year.

 Grand Prix 
This fund's wacky trajectory has enabled more than a few fund analysts to unleash car-themed jokes. Only "crash test dummies" would want this "out of control" "lemon," we opined over the space of three Analyst Reports. This year’s 36% loss to date is just a taste of losses that have hit this fund’s shareholders. It's one of the most volatile funds in our database, yet investors haven’t been rewarded for sticking with it. It has lost an annualized 22% over the past five years. And it charges 2.49% in expenses to boot.

 Van Wagoner Emerging Growth 
Manager Garrett Van Wagoner is certainly a cut above the manager of Grand Prix fund, but many of the same things apply to this fund. It’s so volatile that it’s tough for investors to make money in it. This year’s 34% loss is evidence. To make money with this fund, you’d have to buy after a brutal loss like that one, and you’d have to be prepared to endure an even bigger loss after you bought in order to have a shot at the huge gains this fund produces on occasion.

Reynolds Fund  
The name is more sedate than most on this page, but the results are similar. Its annual returns come close to approximating the returns of a night in Vegas: You lose half your money, then you double your money, then you lose half. Unfortunatley, the fund is working on its fourth big money-losing year with only one jackpot in between.

 Firsthand Technology Innovators 
Ouch. This fund is off 33% for the year to date. Look at the portfolio and it's easy to see why: lots of small tech stocks that got whacked. Seven of the fund’s top 25 holdings at the end of the first quarter have lost more than half their value. Firsthand was once a media darling because of its early success, but that was a long time ago.

 Royce Technology Value 
I’ve skipped down to the fund with the 10th-largest loss for the year to date, because it actually has some appeal. It’s run by a solid firm known for good fundamental analysis. Manager Jonathan Cohen gained fame in the late 1990s for being a realist on  Amazon.com’s (AMZN) stock at a time when the rest of Wall Street couldn’t help rationalizing ever higher valuations. From what I’ve just described, you might think that this fund uses a strict value strategy, but in fact it’s very aggressive. It put up an enormous 90% return last year with a focus on small but fast-growing tech stocks. This year it’s showing just how much risk that strategy has, as the fund is off 31%. So, if I had to pick a fund from among the 10 worst performers, this would win hands down. However, in reality I’m not buying because its 1.99% expense ratio is too steep and its strategy too aggressive for my tastes.