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Fund Spy

22 Mutual Funds That Scream 'Dump Me!'

Bad funds, bad funds, what ya gonna do?

Premium Members of Morningstar.com know to head right to our Fund Analyst Picks and Pans lists because we cut right to the chase there and let you know what we think are the best and worst funds around.

Our methodology is quite similar for each list. For picks, we chose funds with strong competitive advantages such as good management, sound strategies, low costs, good stewardship, and strong long-term performance. Picks don't have to have all of those qualities, but they must be standouts in some areas and okay in the rest. Our pans are focused on funds with strong competitive disadvantages.

Over time it's become clear that our picks list is much more stable than our pans list because you can't just build up competitive advantages overnight. Our pans list changes quite a bit. Sometimes it's happy news--maybe a fund has made big changes and upgraded management or cut expense ratios. For example, AllianceBernstein has made progress on both fronts and only has a couple of funds left on our pans list now. However, more often pans come off because fund companies notice the same flaws we do and opt to kill off their mistakes. As a result, we're constantly on the lookout for new pans.

I'll share 22 of the most recent additions to our pans list. Premium Members can see the whole list of pans here and picks here.

 SunAmerica Focused Large Cap Growth 
At first blush, this would seem to be an appealing fund. The idea was to hire three good subadvisors to run focused portfolios that would be combined into a more diversified whole. In fact, with Tom Marsico, BlackRock's Bob Doll, and Louis Navellier as the managers, this might seem to be a no-brainer. However, SunAmerica has changed managers so frequently that this fund has actually lagged the returns of Marsico and Doll by a wide margin.

Consider that, over the trailing five years ending March 21,  Marsico Focus (MFOCX) returned an annualized 7.21%,  BlackRock Large Cap Growth  returned 6.68%, and Navellier Top 20  returned 3.37%, but the SunAmerica fund returned just 3.39%. That's in line with Navellier's performance but well behind those of Marsico and BlackRock. The reason is that the fund changes managers frequently and either its selection or timing is off. Doll only came on board in December 2006, and Navellier and Shawn Price (also of Navellier) came on board in December 2005.

ING Principal Protection III , IV, V, VI, VII, VIII, IX, X, XI, and XII
That's right. We're panning a whopping 10 principal-protection funds from ING. Principal-protection funds are a bad idea made worse by ING. The basic concept is that the funds promise to at least return investors' principal after a set number of years while still providing some market upside. The catch, as with many insurance company products, is that you pay too much for that safety. In the case of most principal-protection funds, they invest so conservatively that you get very little upside. In fact, many let the insurer make the asset-allocation decision--so of course the insurer is going to choose something superconservative to protect it from having to pay off.

Interestingly, ING has recently made an about-face on its asset allocation at these funds. It has raised the equity exposure by 10 to 15 percentage points so that the funds now have 40% to 50% in stocks. So, a few years ago, coming out of the bear market, stocks were too pricey, but now they're cheap? I guess they're following a sell-low/buy-high strategy.

Either way you get lots of fees. The ING funds that we panned charge between 1.48% and 1.75%, even though most funds that are mostly fixed income with a slug of stocks charge half that. The performance of these funds has borne out the fears we expressed soon after they were launched. Of the six ING funds mentioned above with a track record of three years or more, all are 1-star funds, and the three-year returns range between 1.92% annualized and 3.61%. In short, your principal may be protected from absolute losses but you'll be lucky if your return even keeps pace with inflation.

High-Cost Low-Return Value Funds
Many of the best value managers charge nice low fees.  T. Rowe Price Equity Income (PRFDX) charges an expense ratio of 0.71%,  Dodge & Cox Stock (DODGX) charges 0.52%, and  American Funds Washington Mutual (AWSHX) charges 0.57% in expenses. So, it's kind of crazy to pay 2 to 3 times those expense ratios for funds with poor performance.

Yet there are a slew 1- and 2-star funds that provide you the opportunity to do just that. Ancora Equity   charges 1.80%; BlackRock Basic Value II   charges 1.63%; Dean Large Cap Value (DALCX) charges 1.85%; Direxion Dow 30 Bull 1.25x , a leveraged index fund, charges 1.75%; Flex-funds Aggressive Growth  charges 2.32% when you factor in underlying fund costs; Payson Value  costs 1.74%; Saratoga Large Capitalization Value (SLVYX) charges 1.92%; and Spirit of America Large Cap Value (SOAVX) charges 1.97%.

Avoid those funds like the plague.

Bad ETFs
We don't have ETFs in our picks and pans lists yet, but there are certainly some that deserve pick or pan status.

In the February 2007 issue of Morningstar FundInvestor I told readers where not to invest in 2007 and included three ETFs: PowerShares Lux Nanotech , HealthShares Metabolic Endocrine, and Claymore MACROshares Oil Up. The Lux Nanotech fund charges 0.73% for an index tracking a field where the likely investment candidates are as small as the technology. Likewise, the HealthShares ETFs have high costs (by ETF standards) and tiny little niches such as Metabolic Endocrine. Finally, the Oil Up fund is a pricey way to bet on the direction of oil prices.

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