IBD Chief HammersAnother Nail in Momentum Coffin - TheStreet

Being an investment icon and succeeding in the mutual fund business aren't always the same thing.

Case in point: momentum investor

William J. O'Neil


O'Neil, founder and publisher of

Investor's Business Daily

, quietly folded his tent last week, ending a second attempt to build a mutual fund around the famed investment system he laid out in his book,

How to Make Money in Stocks


With the market caving in on momentum investors, O'Neil's decision is more bad news for the growth-at-any-price crowd. Not only did O'Neil decide to get out last week, but another big name in momentum investing, Louis Navellier, resigned as manager of an equity fund that bears his name after a disagreement with the fund's trustees.

Is this the beginning of the end for the momentum funds?

"That is dumb,'' the 63-year-old O'Neil growled at us on the phone last week.

O'Neil says his decision to transfer the assets of his fund into the

MFS Emerging Growth

fund (

(MEGBX) - Get Report

MEGBX) says nothing about momentum investing. Instead, O'Neil says he wants to concentrate on his three other faster-growing businesses -- his core institutional research firm,

Investor's Business Daily

and his commercial printing business.

Certainly no one would accuse his

New USA Growth

fund (

(NUSFX) - Get Report

NUSFX) of being a growth business. He started the fund in 1992 and had attracted an impressive $170 million after just a month on the basis of his near-cult following. Five years later he had just under $200 million in assets when he punted last week.

The fund was based on his so-called C-A-N-S-L-I-M system. His seven principles of investing: current earnings; annual earnings gains; new products; supply and demand; leaders or laggard performance; institutional ownership; and market direction.

The system had made him rich enough to pour tens of millions of dollars of his own money into chasing

The Wall Street Journal

with his

Investor's Business Daily

. But because O'Neil's finances are private, no one had ever been able to track his results.

His fund offered the best proxy to date -- and the results have been decidedly mixed.

Over the life of the fund, New USA Growth gained 90.0% versus 98.4% for all growth funds, ranking it 162 out of 276 similar funds tracked by

Lipper Analytical Services

. Over the last year it was up 15.4% versus 18.3% for all growth funds, putting it at 498 of 705 growth funds. Like other momentum funds it was getting hammered this year: down 4.0% versus a gain of 5.0% for all growth funds, ranking it an ugly 772 of 786 growth funds tracked by Lipper.


calls New USA Growth "a study in extreme investing." The fund, managed day-to-day by O'Neil protege David Ryan, is willing to pay high prices for its stocks, even by growth fund standards, says Morningstar analyst Jon Hale. The fund's turnover rate is a high 400%, and the expense ratio exceeds the group average by almost one percentage point. While the aggressive growth group tends to be volatile, "this fund has been even riskier than its average peer," says Hale.

This isn't the first time that O'Neil has tried and failed in the mutual fund business. His

O'Neil Fund

ran up big gains in the bull market of 1966-67 but crashed along with the market in 1968-69. When the market came back his fund didn't, and he sold it in 1975 with just $6 million in assets, down from a peak of $49 million.

The good news for O'Neil investors is they will be getting one of Boston's best investors to manage their money. John Ballen, who will roll O'Neil's assets into his MFS Emerging Growth fund, currently gets four stars from Morningstar, and his fund has managed to finish in the top third or better in seven of its nine full calendar years.

In O'Neil's book,

How to Make Money in Stocks

, he left readers with this parting advice: "Have courage, be positive, and don't ever give up. ... You'll find that little acorns can grow into giant oaks."

Sometimes, however, they just wither away.

Steven Syre and Steve Bailey write a financial column for

The Boston Globe.

This column is exclusive to

The Street.

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Momentum Funds in the Darkness Before the Dawn


. Mutual funds that buy high-growth, high price-to-earnings ratio stocks have gotten crushed over the past nine months.

Who's Got Your Money? John Ballen


. A profile of the manager of MFS Emerging Growth.