Yikes ... These Funds Have Been Bludgeoned....
Beware of these portfolio-eating zombie funds that are still around for some reason.
Now this was an October to embrace. For all the scary headlines, the markets surged and many indexes are back in the black.
Sadly, though, some funds don't know that they held a rally. Some are down an impressive amount given that the markets are mostly modestly positive or only slightly negative.
Let's take a look at the funds with the biggest losses for the year to date through last Thursday. Although some of these funds are obscure, there are some broader lessons to be learned. I'll skip over the superleveraged index bets from the likes of ProFunds and Direxion, as there's not much to that story. I have included their rankings from the bottom up starting with the biggest loser at number one.
1. YieldQuest Core Equity , negative 56%
YieldQuest has achieved something truly disturbing. The fund family has three funds in different asset classes, and all three have lost more than 40% this year. The other disasters are named 4. YieldQuest Total Return Bond and 5. YieldQuest Tax Exempt Bond , which are down 44% and 43%, respectively.
A look at their April portfolios doesn't provide a lot of answers. The funds buy lots of exchange-traded funds, closed-end funds, options, and futures, and they trade at a rapid rate, so I'd imagine little of what they had in April is still in their portfolios.
The equity fund shows some short bets against emerging markets and the euro, which should have worked out well. Even the muni fund has some currency bets, which are a strange thing for a muni fund. But the answer may lie instead in some articles on its website in which they warn of the dangers of rising rates. It could be that they made some big bets on interest rates rising and then got burned by the flight to quality that drove down Treasury prices. One way or the other, something weird is happening here.
In any case, I can't recall a time when a fund company had three funds in different asset classes that all had such similar and extreme behavior.
2. Birmiwal Oasis , negative 55%
Lesson one: Don't invest in a fund that sounds like a tiki bar. Lesson two: Beware of a fund that has extremely different performance from its peers. That doesn't make it an awful fund, but you should know going in that it's going to have years where it finishes last. This fund has been either first or last in its category for most of its existence. In fact, it finished first among small-blend funds in five of its seven full calendar years. Yet this year's drubbing and a 63% loss in 2008 mean that the fund is way behind the average small-blend fund since its 2003 inception.
Even if you were looking at the fund when it had outstanding performance, there were red flags aplenty. First, it sports a crazy four-digit turnover ratio and a micro-cap portfolio. Trading that much in tiny stocks must rack up huge trading costs. Adding to that high hurdle is an expense ratio that mostly has been more than 3% and is 4.03% today. The combination of those hurdles is more than Warren Buffett, Peter Lynch, or Bill Gross could overcome even on their best days.
3. The USX China , negative 54%
I'm not sure what The USX China sounds like, but it is definitely not a mutual fund you'd want to own. The fund is now shooting the moon with the worst losses in its category in the trailing month, year to date, 12 months, three years, and five years. Now that's consistency. The typical China fund is up about 5% annually for the past five years, and this fund is down 14% annualized. That smarts.
6. Apex Mid Cap Growth , negative 35%
This is another fund that's always near the top or bottom. Its turnover is a mere 128%, so I'll hazard a guess based on its July portfolio. The fund owned Netflix (NFLX) and two Chinese solar companies. Ouch. Oh, and the fund charges an obscene 7% expense ratio. Note to fund directors: If a fund you oversee is charging more than 2.00%, just liquidate it because it has virtually no chance of success.
7. Dreyfus Emerging Asia , negative 32%
This is much more straightforward. The fund is one of the most aggressive Asia plays. It leans heavily toward small caps and China. It has 35% in China and another 8% in Hong Kong, and its market cap is just $1.9 billion. Being aggressive in an already-aggressive category makes for some wild swings. The fund's annual returns tell the story--2008: negative 61%; 2009: 130%; 2010: 14%; year-to-date 2011: negative 33%. So, how do you make use of a volatile niche fund like this one? It's really pretty straightforward. You need to have a minimum holding period of 10 years, and you need to limit it to less than 5% of your portfolio. The swings are too extreme and unpredictable to let a fund like this wreak havoc on your portfolio.
8. Guinness Atkinson Alternative Energy (GAAEX), negative 29%
This operates in an even smaller niche than Dreyfus Emerging Asia does. The fund is largely a bet on solar and wind power, and most of the holdings are small companies facing big challenges but with the potential for big rewards. The size of those challenges is clear from the scary five-year loss of an annualized 19.5% and an even worse Morningstar Investor Return of negative 26.8%. (Investor returns are asset-weighted return figures that tell you how the typical investor did in the fund.)
9. Oberweis China Opportunities (OBCHX), negative 29%
This fund attempts to apply Aurora, Ill.-based Oberweis' momentum strategy to Chinese equities. Since inception, the fund has matched the China category average. Momentum investing makes it one of the more volatile funds in the category, so again--what I said about niche investing.
10. Legg Mason Capital Management Opportunity (LMOPX), negative 29%
About 10 years ago, Bill Miller said that Kodak was trading at $50 but was worth $100. He has stuck to his guns over the years, and today it is a $1.25 stock. Miller finally cut a little over half his stake in Kodak in the third quarter. His larger fund, Legg Mason Capital Management Value (LMVTX), dumped it in 2010. Most of his names haven't been that bad, but Miller has had a tough year. He's been hard hit by top-10 holdings Boyd Gaming (BYD), Synovus Financial (SNV), MGIC Investment (MTG), and Clearwire , which are down between 39% and 76%. At this fund relative to Value, Miller has greater flexibility in terms of market cap and the ability to go short. Since the fund was launched in 2000, it has outlegged Value, though it's a bit behind the S&P 500.
11. Firsthand Alternative Energy (ALTEX), negative 28%
While it is a bit ahead of the Guinness fund, it's much scarier. Its top "holding" is 19% of assets in "Other Assets in Excess of Liabilities." Kevin Landis likes to dabble in private equity, and that leads to all sorts of pricing and liquidity challenges. So much so that he converted Firsthand Tech to a non '40-Act investment. Mutual funds are great for so many types of securities, but ones that lack liquidity and are hard to price are not a great idea.
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Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.