To start off the new year on the right foot, lots of people throw out stuff that's past its prime. So in the spirit of new beginnings, we apply that principle to mutual funds. Below, we offer up three funds to dump.
2001: The Return of Graham and Dodd
Funds to Dump in 2001
Is Zale a Jewel for Next Year?
Mister Softee's Melting
Just One Word: Staples
here to see
2001: New Year, New Rules stories from earlier this week.
We've searched out three that land in the bottom quartile of similar funds for five-year and three-year periods. Two of the funds also rank in the bottom 25% for performance over the last year.
None of these funds has good excuses for lame performance. Each of the three we profile below has hundreds of millions of dollars in assets and lots of institutional resources to draw on. There's nothing here that smacks of the underdog trying hard and failing. These are heavy hitters that have been around a while, and still don't make the grade.
Over time, they've proven themselves to be consistently second rate. There are simply better places to put your money.
Lest we sound too harsh, know that we gave lots of merely run-of-the-mill crummy funds a pass. For the selection process, we screened for no-load funds with assets of at least $200 million in the large-cap growth, large-cap value and small-cap growth categories, then examined the worst-performing funds of those that ranked in the bottom 50% of their peers over a five-year period. We avoided picking on funds with manager turnover within the last few years, since newcomers can hardly be blamed for poor long-term records. We've also passed on funds that have undergone sweeping transformations in strategy. The vast majority of bottom-ranking funds fall into at least one of those two categories.
But for the most part, the three funds we picked to profile haven't done much to clean up their act.
Let's start first with a large-cap growth fund with an impressively long record of mediocrity: $388 million
Value Line, at 50 years of age the oldest (and most decrepit) in the
fund family. This fund screens for stocks using a proprietary approach that considers earnings and price momentum. Its 10-year record is uninspiring, placing it in the 74th percentile. Five- and three-year records place it well within the bottom quartile.
Recently, to be fair, the fund's performance has turned up slightly. Over the past year it's almost managed to crack the 50% mark and rank, for a change, in the top half of its peers. But not quite. Value Line also consistently ranks in the bottom 25% of funds in its category for tax efficiency.
In a reflection of how little there is to talk up, the fund's Web boasts that it doesn't levy a sales charge. (Not exactly cause for bugles.)
It's not as if Value Line hasn't made money: It claims annualized returns of 15.7% over the last 10 years, which would add up to a pretty nice chunk of change. But over time, the fund has consistently made less money than the vast majority of its peers.
How to explain the relatively lame performance? Alan Hoffman, a senior portfolio manager at Value Line, gives three reasons. One is manager turnover. Within the last five years, three different groups of managers have been involved with the fund, all with slightly different styles. (Even with the turnover, we think this fund is fair game for criticism because it's never aimed to have one dedicated manager; a team runs it.)
Another problem, Hoffman acknowledges, is that the Value Line system seems to do a better job at picking small-cap stocks than large-caps.
And the third problem (an unusually frank admission for a fund family) is institutional neglect. "Value Line goes back 50 years; it's our flagship equity growth fund. As we develop newer products, Value Line didn't have any special spark or sizzle or bell or whistle," says Hoffman. "It's been kind of neglected in some sense." Yikes!
Any moves under way to change that? "Our quant department is always looking at tweaking the system," says Hoffman. "I'm not aware of the current state of their research."
Among large-cap value funds, one surprising laggard is $310 million
Legg Mason Total Return.
has a reputation as one of the best value stables around. And even Total Return has had its good years: It bested other value funds by over 10 points for two years running in the mid-90s. But there's no arguing with its dismal record over time: It landed in the 79th, 100th, and 81st percentiles over five-, three- and one-year periods. Over the last decade, it finished in the bottom third of its peers.
Manager Nancy Dennin, who's been with Total Return since 1992, attributes the lagging performance to the fund's focus on relatively higher-yielding securities. For the last few years, these stocks have been punished by the market as the perception has taken hold that they have minimal growth prospects. In 1999 alone, according to Dennin, the 50 highest-yielding stocks, with an average yield of 5.8%, finished down an average of 26%.
Given that dynamic, Dennin says she decided early this year to change her approach a little, broadening her list of names to focus less on companies with high dividend yields and more on those using free cash flow either to pay a dividend or to buy back stock. "It used to be the case that in the universe of high-yielding stocks, there were companies that did have pretty good growth prospects," she says. "Now the universe of relatively high-yielding stocks is more laden with stocks that have limited growth prospects."
But even after the tinkering, Total Return lagged behind its peers by six percentage points through the end of November, according to
. For a value fund, it seems to have the potential to be relatively volatile, too, with around 42% of its assets in the top 10 holdings. Also on the downside are Total Return's operating expenses of 1.89%, well above the category average of 1.40%.
More on the theme of funds from good families that have gone astray:
Dresdner RCM Small Cap, which holds $249 million, lands in the bottom 25% for every measurable period it's existed, from five years to the current year to date. The
group operates a number of quality growth funds, but Small Cap isn't one of them. It lost money over a three-year period, with annualized negative returns of 1.62%.
Over five years, while the fund was in the black, it racked up an abysmal tax record, losing just over 68% of its gains to taxes. That landed it in the bottom 10% of its peers for tax efficiency.
This fund, like Value Line, is managed by a team. Dresdner RCM did not respond to a request for comment on its performance.
For better alternatives to all the above-mentioned funds, check out the Daily Screens for the
best large-cap growth funds,
large-cap value funds and
small-cap growth funds.