Fund managers are fond of saying that picking stocks is a humbling business. Ditto that for us poor fund-pickers.
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It's a lousy time for growth funds, which have some 40% of their cash in the sagging tech sector, on average, according to
. Big-, mid- and small-cap growth funds, which got the bulk of cash flows in recent years, are the worst-performing nonsector fund categories over the past year. In that time these fund categories have lost more than a quarter of their value, on average.
On Thursday afternoon I gave in to my more ghoulish instincts and decided to sift all those battered growth funds to find the biggest, most consistent losers vs. similar funds. It's easy to sit back and wonder what kind of a simpleton owns shares of these dogs. Unless, of course, you realize you own one -- and I do. Like a plumber with a leaky faucet or a quarterback whose son tries to dribble a football, I've got some explaining to do: I own one of them.
There's a lesson in this screen for fund-investing vets, as well as another one for neophytes. For the vets: If one of your funds is on this list, it might be time to put it up for review and think long and hard about why you own the funds on it. For novices, learn from my mistake: Don't jump into an aggressive, volatile fund that just came off a really hot year.
First, let me introduce the losers. To find these sad sacks, I singled out those that had at least $100 million in assets and trailed at least three-quarters of their peers over the past one-, three-, five- and 10-year periods. It's hard to consistently trounce your peers, but it's hard to be consistently trounced, too. There are more than 200 growth funds with 10-year track records out there. Only 10 made my dubious list. Here they are, ranked by their losses over the past year.
So I own shares of the bleeding, mid-cap growth
Putnam OTC & Emerging Growth fund.
But how did I end up owning a fund that has averaged a slight loss over the past
years and a 7% loss annual loss over the past three?
I bought shares in this broker-sold fund five years ago when I took a job at the Boston firm and had never invested in anything before. Like other employees, I didn't have to pay a load, or sales charge, and I was wowed by the fund's 54.8% gain the year before. That topped the
by more than 17 percentage points and dusted 96% of its peers.
What I failed to understand was that the fund, which routinely puts the majority of its money in small- and mid-cap tech stocks, is one of the most aggressive around. Given that approach, it has feast-or-famine performance. It trailed almost all of its peers from 1996 to 1998, then rocketed up more than 125% in 1999's frothy tech-stock bonanza, making me feel pretty smart.
Then last year it lost more than half its value and so far this year it's down almost 28%. The fund is among its category's five worst performers since Jan. 1, as well as over the past one-, three- and five-year periods, according to Morningstar. If you're wondering about the folks that hold the reins, co-manager Steve Kirson pounded the table for tech and telecom stocks in a
10 Questions interview last year, a faith
Jim Cramer chastised later on.
In the years since I bought my shares of this fund I realized that it was essentially a tech fund and I gave it the same weighting I'd give an aggressive sector fund, less than 10%. So, it's an unpleasant roller-coaster ride but at least it's not a big part of my portfolio.
Whether you own these funds or not, this worst-case scenario does argue for the reliability of an index fund for a core stock holding. After all, a portfolio of these 10 laggard funds would've consistently trailed the
Vanguard 500 Index fund.
A point that shouldn't be overlooked is that these funds that look so brutally ugly now have not always been so unattractive. The
Invesco Blue-Chip Growth fund, for instance, beat its average peer from 1996 through 1999. And the
AXP Strategy Aggressive fund beat its peers four of the five years from 1995 through 1999.
Of course, there are funds on the list that are more obvious losers. The broker-sold
John Hancock Growth fund, for instance, has lagged the S&P 500 for seven straight years -- yes, I worked there, too, and no, I don't own that fund.
Interestingly, many of these funds hold the same stocks as their peers, but apparently paid higher prices for them. If we toss the big-cap growth funds on our list into a pot and sift out a cumulative top holdings, we end up with stocks like
-- the same names held in many less-ravaged peers.
The Junk Pile
IPO market surged in 1999, boosting the
IPO Plus Aftermarket fund to a 114% gain and leading Hambrecht & Quist to launch the
H&Q IPO & Emerging Company fund and
to roll out an IPO fund of their own. Now, however, the downside of launching a fund focused on a sizzling, volatile and narrow sleeve of the market is bearing out: The IPO area is god awful, and these three funds are taking a pretty serious beating.
Fund Junkie runs every Monday, Wednesday and Friday, as well as occasional dispatches. 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.