MUTUAL FUNDS / YEAR-END REVIEW : Whom Can You Trust? After a decade in which almost every manager could claim success, 1994 proved that most gains aren’t automatic--reminding investors that some strategies are better than others. : The Laggards--Red Flags in the Sunset
This is a time of year for reflection and hope, but for shareholders in a few dismal mutual funds, it’s hardly worth the effort.
These are the funds that always seem to wind up at the bottom of the annual performance rankings. They exist in a sort of investment purgatory, doomed to drift from one agonizing year to the next because their managements aren’t willing to do the humane thing and merge the funds out of their misery.
Most of these perennial laggards exhibit at least one of these traditional red flags:
* A chronic inability to beat the market or similar types of funds.
* Alarmingly high expenses--often in excess of 3% a year--that erode or even exceed returns.
* A small and shrinking asset base.
* High portfolio turnover, as managers keep experimenting with new combinations of stocks or bonds.
* Legal problems, sometimes resulting in management changes.
You don’t often hear about these non-success stories, as fund officials either lack the money to advertise or don’t want to call attention to their sickly track records.
Further, many of these funds are small, and few newspapers list the smallest funds in their tables. Rating services such as Morningstar Mutual Funds and the Value Line Mutual Fund Survey often drop coverage when the shareholder base wanes--assuming they had ever commenced coverage at all.
The reigning champs of futility, the fund world’s equivalent of the old Washington Senators, are the four portfolios run by the Steadman family.
Fortunately, new investors aren’t in much danger of accidentally making purchases because three of the four remaining Steadman funds have been closed to new shareholders since the late 1980s.
The exception is Steadman Associated, the company’s flagship fund, but still one of the most dismal performers. It returned about 15% over the last 10 years through Dec. 29, according to Lipper Analytical Services.
Impressed? Keep in mind that the average stock fund advanced about 236% over the same period.
Charles W. Steadman, a Harvard-educated lawyer who heads the firm, recently was labeled “about the world’s worst mutual-fund manager” by Financial World magazine, although it wasn’t clear why the publication minced words.
Based on the performance of the other three Steadman funds, the group is clearly at the bottom.
Steadman Oceanographic had a negative return of more than 60% for the last decade, positioning it as the worst mutual fund, albeit only a few botched trades behind Steadman American Industry. Steadman Investment, down 31%, completed the hat trick of negative returns. All Steadman funds have been bogged down by poor stock picks and by exorbitant annual expenses, which Morningstar puts at between 6.5% and 12.7%, depending on the portfolio. By contrast, the average yearly cost for stock portfolios is 1.4%.
Although no other mutual-fund groups fall into Steadman’s class, it’s not to hard to find honorable-mention candidates.
One would be the Monitrend group, which counts about $7 million spread across its portfolios. The three Monitrend funds tracked by Morningstar each have earned one star--the lowest rating. But poor performance didn’t stop the Nashville, Tenn., company from raising sales charges during 1994.
If there’s one remarkable figure here, it’s the 969% portfolio-turnover rate logged by Monitrend Gold in 1993. (Figures for 1994 aren’t in yet.) That was 12 times the stock-trading frequency of the typical gold fund--a sign of indecision on management’s part.
Then there are the three Progressive funds, also rated one star and counting less than $5 million in combined assets. Over the past year, investment-advisory duties were transferred from Schield Management of Denver to a New York company that runs the 44 Wall Street Equity Fund.
The latter is an erratic long-term performer that swallowed its older sibling, the 44 Wall Street Fund, in a 1993 merger. For what it’s worth, 44 Wall Street finished as the top mutual fund of all in 1975. How times have changed.
Fortunately, some laggard funds do get merged into healthier portfolios, erasing their sorry track records in the process. Just this past week, for example, Centurion Growth got swallowed by Vontobel U.S. Value.
Another notable disappearing act in 1994 involved the merger of Pilgrim Corporate Utilities of Los Angeles into the Leper-Istel Fund of New York.
The Pilgrim Group in general has suffered a serious asset loss in recent months, culminating in a decision by management in December to sell roughly two-thirds of the family to Express America Holdings of Scottsdale, Ariz.
Then there was the decision by Oppenheimer Management of New York to transform its Global Bio-Tech Fund into a new Global Emerging Growth portfolio.
What’s interesting here is that Oppenheimer opted to change what had been a winning strategy just three years before. The Bio-Tech portfolio scored a sizzling 121% gain in 1991--best in the fund business that year. But performance lagged thereafter.
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View From the Bottom
You would have been worse off by choosing if your investments in 1994 were spread among the five worst long-term performers.
10-year 1-year return return 1983-93 1994 Steadman Oceanographic -62.48% -37.1% Steadman American Industry -55.30 -37.2 Lexington Strategic Inv. -54.12 +11.3 United Services: Gold Shares -39.54 -2.7 Centurion Growth Fund -12.35 -7.8* AVERAGE OF 5 FUNDS -44.8 -14.7
* As of 12/24/94; Centurian Growth Fund merged with Vontobel V.S. Value 12/27.
Source: Lipper Analytical Services
