Mutual funds are not people. Their death does not diminish mankind.
Some 900-plus funds were liquidated or merged out of existence in 2006, down about 25 percent from 2005 and the lowest extinction level in several years. Investors should not ignore for whom the bell tolls.
As they shuffled off this mortal coil, some of these funds created a legacy that investors can learn from. With that in mind – and in the spirit of year-end retrospectives that show famous people who met their end in the past 12 months – investors should pay their due respects to the noteworthy mutual funds that passed in 2006.
Among the “dear departed:”
Matterhorn Growth
Of all mutual funds battered by Black Monday in October 1987, this fund suffered the absolute most. It lost more than half its value the month the market cratered, and was off more than 40 percent for the year.
Some observers said the fund never really recovered, but the real problem was horrible stock-picking, rather than one bad month. Matterhorn Growth had 10 percent of its assets in Enron when that company imploded.
Pebblebrook
This small, Houston-based nondiversified fund opened in 2003 and never had much performance to speak of, but it leaves a strong reminder of why investors should read the paperwork a fund sends them.
In late June, Pebblebrook’s independent registered public accounting firm wrote shareholders and directors, and summed up its findings by saying, “Control procedures were not in place to ensure compliance with regulatory matters.”
The company’s attached response – and I could not make this up – said that Pebblebrook management “believed it had control procedures in place to ensure compliance with regulatory matters. Management deluded itself.”
If management claims to be delusional, especially on safeguarding securities, investors should run away.
Phoenix Nifty Fifty
There’s nothing nifty about a fund stuck in the bottom 10 percent of its large-cap peer group for the one-, three-, five- and 10-year periods, with an annualized gain of less than 0.5 percent over the last decade. It’s being merged into Phoenix Capital Growth, a fund that’s been nearly as bad. Despite new management, shareholders might have preferred liquidation to being a zombie.
Janus Olympus
When Claire Young, manager of the lagging Olympus fund, left Janus, management handed the reins of the $2.2 billion fund to Ron Sachs, manager of the stronger Janus Orion fund. Rather than keeping a great brand name – despite recent troubles, Olympus had a lifetime annualized return of nearly 11 percent – and splitting Sachs’ attention between funds, Janus did the right thing and folded Olympus into Orion. More funds should die good deaths like this.
Managers 20
Affiliated Managers Group hired Oak Associates to run this fund in 2000, trying to profit from Oak’s 20 best ideas.
Unfortunately, the bull market was over and Oak hit the skids. By focusing on a few stocks, mostly bad ones, Managers 20 got killed. The fund had an average loss of more than 20 percent per year for the past six years; worse yet, Affiliated Managers Group did nothing until finally euthanizing the fund.
Grand Prix
Manager Robert Zuccaro and his fund were bull-market superstars, Zuccaro for forecasting that the Dow Jones Industrial Average would hit 30,000 by 2008, and the fund for back-to-back triple-digit gains (112 and 148 percent in 1998 and ’99 respectively).
But when reality and the bear market set in, Grand Prix lost 33 percent in 2000, 56 percent in ’01, and 47 percent in ’02, completely eroding those massive gains. Zuccaro started 2005 telling shareholders that the Dow could still reach 30,000 by 2009, and ended it by filing the paperwork to wave the checkered flag on Grand Prix and its sister Grand Prix Mid-Cap.
Chuck Jaffe is senior columnist for MarketWatch. Reach him at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
