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Rekenthaler Report

Specialized Funds Fail Investors

Noncore funds have been used poorly for years, but there are signs of hope.

Investment Flops
As a first approximation of the truth, it’s fair to state that specialized funds are useless. By “specialized funds,” I mean any funds that are not core holdings. Examples include sector funds, regional or country funds, niche bond funds, and most alternative-investment funds. By “useless” I mean that such funds do not make money for their shareholders. They might perform well on paper, but they fail their owners in the real world, because investors typically buy those funds high and sell them low.

This happens because the fund industry is constructed like the food pyramid, but in reverse. That is, there are but three large-company U.S. stock-fund categories and a handful of mainstream bond categories. Meanwhile, there are 14 flavors of sector mutual funds, and another 18 of sector exchange-traded funds. Never mind all the other types of specialized funds. These categories should be consumed sparingly, if at all, but they dominate the listings. The base of the fund-industry pyramid consists of 73 varieties of chocolate.