Monday, June 30, 2008

The World's Worst Mutual Funds

I was perusing E*trade's mutual fund screener the other day - I don't know why, since I always invest in index funds anyway - but all of a sudden I was struck by an irresistible urge to search for some really horrible funds. I mean, I wanted to find some mutual funds that belong in the mutual fund hall of shame or some investor horror movie. I am talking Horrible with a capital H.

To participate in my experiment, funds had to meet several key criteria: an expense ratio above 2%; three year annual returns below -5%; and performance relative to their peer group that placed them at the bottom 20%. For good measure, I also specified that the funds screened had to carry a load... wow, that's pretty bad. Just to finish off the picture, I insisted that each fund carry a Morning Star rating of 1 star.

Would you invest in such funds? Well, apparently some people would. My search criteria yielded 175 results. I did not stop there. I then sorted the resulting list by expense ratios. The fund that rose to the top (or the bottom, really) was American Growth B (MUTF:AMRBX ). Here are the performance characteristics of this amazing fund according to E*trade: since inception in 1996 the fund returned -5.51% annually (yes, that's a negative 5.5%)... the fund charges a 5% load and has an expense ratio of 4.39%. Do people invest in this fund? Not many, but apparently some people just love pain... the fund manages about $5M in assets (the good news is that at this performance level the assets under management keep diminishing on a daily basis, but not for the right reason).

To be perfectly fair, the fund received a major blow following the dotcom bubble, and it did have positive (if meagre) returns over the past 5 years (2.34%), but how can fund management justify expense ratios of over 4.4% AND a load of 5% with such horrendous performance? If I were managing that fund, I would give up my keys to the executive suite, crawl under a suitably shaped rock and make sounds like a particularly small ant.

Just for the hell of it, I decided to run another experiment. My goal: to find the fund with the worst 10 year performance. Boy, did I find it. Here it is, ladies and gentlemen, the fund that would completely cripple your portfolio if you were unlucky enough to put your money into it: VAN WAGONER EMERGING GROWTH (VWEGX). This fund, which was started in 1995, has average annualized returns over 10 years of.... wait for it... -9.34% (yes, MINUS 9.3%). This is compared to an E*trade reported category average of 5.99%. You gotta give this guy some credit - it takes some major talent to blow it this big. Oh yeah, one more thing: this fund carries a gross expense ratio of no less than 5.88%. Truly, we have a hall of famer on our hands here.

That's right people, there is a sucker born every minute.


Anonymous said...

If there is a short version of this fund i'm buying. i will be rich. LOL

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