Lessons to Be Learned from the Master of Disaster
You can make two assumptions about people invested in the Steadman funds.
1. They are dead.
2. They are about to be put out of their misery.
Charles Steadman is giving investors one final haircut, a coup de grace before sending them off to count the few pennies of their money he hasn’t lost. Thus begins the final chapter in a saga that leaves behind a legacy of lessons. To gain that wisdom, put on the hip boots and wade into the muck of the Steadman Funds.
All four Steadman funds rank in the bottom 10 among stock funds over the last five and 10 years.
Over 10 years, Steadman Technology and Growth lost 89.47% of its value, while the “best” of the lot, Steadman Associated, dropped a mere 9.53%; the Standard & Poor’s 500 index, meanwhile, is up 166% in that time. Numbers that bad have led market watchers to describe struggling funds as having “pulled a Steadman.”
Steadman’s expense ratios run from about 8% for Associated to more than 25.2% for Technology and Growth. In other words, if the assets in the tech fund achieved market returns--23% for the S&P; 500 in the last 12 months--investors still would have lost 2.2% after expenses.
Despite the lousy numbers, Steadman funds have about $8 million in assets held in roughly 15,000 accounts.
Company Treasurer Max Katcher acknowledges that 6,000 accounts are “abandoned,” meaning investors can’t be found and monies should have been turned over to state property authorities.
Few people knowingly abandon accounts, so it is fair to assume that four in 10 Steadman shareholders are dead. Or at least not particularly conscious. The best excuse for remaining shareholders is naivete, the feeling that a financial holocaust of this magnitude could not last forever.
Even naive hangers-on may find death preferable to what happens next. Steadman plans to merge his family into one closed-end fund. But this is no mercy killing in which survivors divide the leftovers; it is the master of disaster’s parting shot.
The way the merger is structured, it will be a taxable event (most fund mergers are not), meaning investors must take losses (or gains, however unlikely) now. The proceeds then go into the closed-end fund.
Closed-end funds trade on a stock exchange, at a price based on public sentiment rather than the value of the underlying assets.
Many closed-end funds now trade at a discount to their net asset value. Given Steadman’s miserable record, investors will shun its offering, which could suck more off the market value of all current holdings.
Katcher says that “this change will benefit shareholders.” Steadman, an octogenarian whose 30-year track record is only marginally better than the last 10 dismal years, isn’t talking.
If the Securities & Exchange Commission balks at the merger/conversion, Katcher said directors might consider a simple shutdown. Either way, Steadman will drop from sight, leaving these lessons behind:
* Protect yourself. This case highlights the SEC’s impotence. The agency made efforts to force changes at the Steadman funds, but none were successful. Likewise, independent directors who were supposed to protect shareholders failed miserably.
If you see signs that something is amiss in your funds, don’t wait for help; it may not be coming.
* Not every fund regresses to the mean. Academics push the theory that managers return to the norm, so that top-notch funds come back to the pack and laggards rise toward the average.
Not always. A stopped clock is right twice a day, but a slow clock might not catch up in our lifetimes.
* Dump any fund that fails to keep in touch. The Steadman funds were notoriously bad about sending statements. Don’t just look at proxies, annual reports and updated statements in the mail; be aware if those things aren’t arriving. Any fund that does not deliver your papers in a timely fashion has serious administrative problems.
* Expenses matter. A fund with exorbitant costs must take greater risks to succeed. Otherwise, it will lag its peers simply because of the higher expense ratio.
Even Steadman had a few quarters in which he was leader of the pack. But his was a volatile ride (Associated up 13% in the first six weeks of 1997, down 18% since). Over time, expenses significantly above the norm will result in increased volatility, below-average performance or both.
* Vote with your feet. If you don’t like what is going on at your fund company, find another one. Without the least trace of irony, Steadman’s Katcher says of the losers who kept his firm afloat: “Shareholders have always had the right to redeem if they don’t like what they see happening to the funds. If someone is that dissatisfied, that’s what they should do.”
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.
