Mutual Fund 'Mutts'

Just as the Dow has its dogs, mutual funds have their mutts. The concept is pretty simple: What gets overly beaten down this year has more upside potential next year.

This strategy is used to identify good companies whose bad year caused them to be overlooked or undervalued.

If the theory holds, then mutual funds that did OK last year (2005) but have taken it on the chin so far this year (2006) have a better chance of making a comeback and be winners next year (2007).

True, this strategy flies in the face of our usual strategy of choosing proven winners that consistently outperform their competitors while taking less risk.

TheStreet.com Ratings' mutual fund model, which reviews risk-adjusted returns, not surprisingly, gives low marks to these poor performers. Buying the funds listed below is not for the faint of heart.

Health, biotech, medical, and life sciences are well represented on the above Mutt list. The need for these products and services will never go away, but companies that provide this care do cycle in and out of favor. The first Mutt on the list is (BIPIX)ProFunds Biotechnology UltraSector, which aims for 150% of the return from the Dow Jones U.S. Biotechnology Index. The fund has given back 6.49% year-to-date. Biotechnology accounts for 79.95% of the holdings with top names including Amgen,(AMGN), Genentech(DNA), and Biogen Idec (BIIB). Amylin Pharmaceuticals (AMLN) and Vertex Pharmaceuticals (VRTX) contribute to the 17.75% concentration of pharmaceutical stocks."

The Worst Performing Funds Of 2006 Rated funds with assets of at least $50 million.
Ticker	Fund	Rating	Total Rturn Thru Dec. 18
BIPIX	PROFUNDS BIOTECH ULTRASEC-IV	D-	-6.49%
PTSGX	TOUCHSTONE SANDS CAP SEL G-Z	D-	-4.81%
ENEBX	AXA ENTERPRISE EQUITY FUND-B	E-	-4.32%
MGRSX	MASSMUTUAL SEL AGG GROWTH-S	D	-4.21%
TGCEX	TCW SEL EQUITIES-I	E	-3.59%
FSHCX	FIDELITY SEL MEDICAL DELIVER	C+	-3.20%
POGSX	PIN OAK AGGRESSIVE STOCK FD	E-	-3.16%
TEQAX	TOUCHSTONE LARGE CAP GRTH-A	D-	-3.02%
TWCUX	AMER CENT ULTRA FUND-INV	E+	-2.89%
AVPUX	AMERICAN CENTURY VP ULTRA-I	E+	-2.79%
AVEIX	ASTON VEREDUS AGGRES GRTH-I	E-	-2.54%
LSGRX	IXIS LOOMIS SAYLES GROWTH-Y	E+	-2.45%
BRMCX	BRIDGEWAY MICRO-CAP LIMITED	E-	-2.34%
RYOAX	RYDEX SERIES BIOTECH-ADV	E-	-1.81%
ALSIX	AMER CENT LIFE SCIENCES-INV	E+	-1.68%
STNAX	SUNAMERICA SS FOCUS TECH-A	D	-1.66%
EUEYX	ALPINE US REAL ESTATE EQTY-Y	E-	-1.58%
KOPPX	KOPP EMERGING GROWTH FUND-A	E	-1.55%
Source: Bloomberg

Google (GOOG) has been in the news with a new service, Checkout, that competes with PayPal to streamline online purchases. Google is also the top holding of the (PTSGX)Touchstone Sands Capital Select Growth Fund. The fund holds other great names such as Starbucks(SBUX), Genentech(DNA), Apple Computer (AAPL) and Yahoo!(YHOO).

The fund's asset allocation breaks down as 17.2% Internet, 15.8% retail, 12% biotechnology, 10.6% pharmaceutical, 10.3% health care products and 9.5% commercial services. If spending $462.80 per share with a price-to-earnings ratio above 56 for Google gives you pause, then consider this fund, which sells for $7.91 a share and diversifies your exposure with an average P/E ratio of just under 38.