Eight Funds That Scream 'Dump Me!'
These funds don't work on Labor Day--or any other day.
These funds don't work on Labor Day--or any other day.
So, you're back from your summer vacation and it's time to do some portfolio maintenance that you put off. May I suggest you begin by pruning some weeds? Get rid of some weak players and you'll probably book some tax losses and have new money to put to work in good core funds. (Try our Fund Analyst Picks list if you need more.)
Here are some funds that just have bad fundamentals. I'm not saying I don't like their asset class or they're sure to have a bad fourth quarter, just that these are bad bets over time. They suffer from some combination of crummy management, high expenses, poor strategies, and other signs that you can do a whole lot better. OK, now let's thin that herd!
Calvert Social Investment Enhanced Equity won't blow up your portfolio, but you are sacrificing quite a lot. The fund aims for indexlike performance but wants to add value on the margins through issue selection. If it did, that would be one thing, but it has instead consistently subtracted value.
The fund has an R-squared with the S&P 500 of 99, which indicates its returns move in near lock step with the index, but its five-year returns are running about 240 basis points annualized behind. It doesn't help that they are charging 1.24% for that index-hugging. The firm recently fired the subadvisor and brought it in-house, but we don't see a strong reason to think that will add value. Vanguard FTSE Social Index charges just 0.24% for an SRI index and Domini Social Equity (DSEFX) charges a little less (1.15%) for an actively managed SRI portfolio run by the venerable Wellington.
I profiled Firsthand Technology Value a couple of months ago for the remarkable fix that it's in. It invested a big slug of the portfolio in illiquid venture capital names. At last count, about a third of the portfolio was in these names. It presents a huge problem because it's hard to price them accurately, so on any given day investors buying or selling might not be getting the best price. In addition, redemptions appear likely to be met with sales of the liquid publicly traded stocks, which would in turn lead the fund to have even more in the illiquid stuff.
At the time, Firsthand had said that it and its board were looking to reduce those positions, but it doesn't appear that anything has happened yet. The fund now has the worst year-to-date returns of any tech fund, and its three- and five-year numbers are bottom-quartile. This is one fund where you don't want to be the last to sell.
Sometimes, the case is a lot more straightforward. Leader Short Term Bond (LCCMX) charges a brutal 1.35% (after a waiver) for a short-term bond fund! Good luck with that. As an aside, I've noticed that a preponderance of our pans have words like first or leader in them. I guess if you have to shout it out, it probably isn't true.
Morgan Stanley U.S. Government Securities (USGAX) has earned our scorn for failing to invest in enough U.S. government securities. You are allowed to invest as much as 20% of a fund in securities that are not covered by the fund name, so it's not illegal--just painful. Last year, government-bond funds and government bonds were about the only thing in investors' portfolios that made money. However, this fund used that 20% exception to venture into nonagency mortgages, and it got whacked. It lost 2.4% last year--about 720 basis points worse than its average peer. It has since taken in those bets and is lagging this year, too.
The pair running that fund also runs Van Kampen Government Securities , which charges a brutal 1% expense ratio and also lost money in 2008. There isn't a bond fund manager alive who could overcome that handicap, and, in fact, the fund is in the bottom quartile of its peer group for the trailing one-, three-, five-, 10-, and 15-year periods. At least this 1-star gem is consistent. Management didn't have money in either fund as of the last filing, and I can see why. Remarkably, though, Van Kampen has attracted $1 billion of investors' money to the fund.
Leveraged exchange-traded funds have been getting a lot of well-deserved negative publicity, but there are also leveraged traditional open-end funds and they're just as bad of an idea as their ETF counterparts. Small caps have been the sweet spot of the market this decade as the Russell 2000 has gained 4.3% annualized the past 10 years. You wouldn't know it from the returns of Direxion Small Cap Bull 2.5X (DXRLX). Consider these annualized trailing returns: one-year: negative 71.6%, three-year: negative 38.4%, five-year: negative 23.17%, and 10-year: negative 11.66%. If you want to lose money gambling, go to Las Vegas and have a great time doing it.
Legg Mason American Leading Companies is a case of a fund that has had ample time to make its case and has failed. Manager David Nelson came on board in 1998, and the fund has lagged its peers and benchmark since then. We've been willing to stick it out with some slumping funds, provided that their long-term records still showed that they are right more often than not. But it's tough to stick it out in a case like this. One thing that this fund has in its favor that the rest on this page lack is manager conviction. Nelson has more than $1 million invested in the fund, so at least he's eating his own cooking.
Federated International Small-Mid Company (ISCAX) manager Leonardo Vila, by contrast, has been on board since 1999 but has a modest investment of $50,000 to $100,000. Vila uses quantitative screens to select stocks and he's had his moments, but his 10-year record is subpar. With a tough 1.82% expense ratio, he'll be hard-pressed to improve on that record.
See the Whole List of Pans
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Last Week's Poll Results
Last week I asked: Which song best fits the fund world's cycle of rapid-fire creation and destruction? Here's how you voted.
10% - Lost in a Supermarket
11% - Passive Manipulation
30% - The Circle of Life --Winner!
19% - Take, Take, Take
5% - I Am Trying to Break Your Heart
25% - After the Gold Rush
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