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The selling point of funds is that they spread your money across a broad portfolio of stocks for a modest cost, giving you the chance to earn the stock market's 10% to 11% annual gains without the risk of betting the farm on just one company's fortunes. But in the midst of the sharpest and most prolonged downturn in fund investors' recent memory, this week's Big Screen has turned up more than a few funds that have redefined investors' perception of how far funds can fall.
We sifted all U.S. stock funds, looking for any that fell more than 85% over the past 12 months. Ordinarily, this would be a fool's errand: Aside from traders' funds, like those from
that use derivatives to get 150% of an index's rise or fall, no U.S. stock fund fell more than 50% in any calendar year in the 1990s.
But we found 17 that made our dubious cut. Yes, there were some funds from the trading set, but only four. The rest were actively managed funds with a stock picker at the helm. In each case, the managers of the funds on our list made titanic bets on tech stocks, riding them to stunning highs in 1999 and early 2000. Now they've ridden them down to equally stunning lows.
If we lump all these funds into one portfolio, we end up with nearly 90% of our money in tech stocks. The portfolio would've risen 222% in 1999, only to fall 88% over the past 12 months. A $10,000 investment in any of these funds on Jan. 1 last year would've been worth less than $3,000 at the start of this month, according to Chicago fund-tracker Morningstar.
The battered funds on this roster amount to a who's who of ultraaggressive tech investors. On it you'll find PBHG emigre Jim McCall (
Merrill Lynch Focus Twenty/
Mercury Focus Twenty), Garrett Van Wagoner (
Van Wagoner Post-Venture/
Van Wagoner Emerging Growth/
Van Wagoner Mid-Cap Growth) and Alberto Vilar (
Another familiar name on the list is Ryan Jacob, the young buck who rang up fat gains running the
Kinetics Internet fund and who started his own
Jacob Internet fund just as the Net bubble started deflating at the end of 1999. The fund has lost ground in five of its first six quarters and is down 87% over the past 12 months.
Clearly, things are tough all over, not just for these folks. The average U.S. stock fund has lost more than a quarter of its value over the past 12 months, worse than any calendar-year loss in more than 30 years. You'd expect these ultraaggressive funds to fall further, because they're typically more volatile than most funds and their favorite sector -- technology -- has cratered.
But you might still be stunned by these losses, which seem downright stocklike. If you're wondering just what the heck these folks did with their shareholders' money, so did we. We tossed each fund into a pot and then sifted out their cumulative top 10. The results made the funds' losses less mysterious.
Each fave is the crushed stock of a former highflying tech company, including business-to-business software outfit
, communications networkers
, and data-storage titan
. On average these stocks are down more than 81%.
It's an instructive exercise to pick over these stocks and the funds that own them. A worst-case scenario like this is precisely why sector funds and growth funds that bet heavily on one or two sectors shouldn't add up to more than 10% or so of your portfolio.
When you hear pundits talking about the concept of "play money," where you toss a modest amount of money into an aggressive fund with a strategy and manager you like, these are the funds they're talking about. These funds are right for very few investors. If you believed in these managers when the
Nasdaq was at 5000, for instance, then maybe you might buy some shares of their funds now that the index is down around 1500. Then or now, the key is to limit the amount of money you give these funds and others of their ilk. Nothing proves that better than their free fall over the past year.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.