The Van Wagoner funds had a great month in May.

But the group's recent success raises a question: Does the recent success of the Van Wagoner funds signal a rebirth of the long-comatose group, or was the bounce just a brief spasm in what might be looking more like a prolonged death spiral?

Given that it has been close to a decade since any really positive words could, with honesty, preface remarks about the performance of Van Wagoner funds, it would seem premature to be celebrating the rebirth of that group.

A look beyond the recent bounce in the funds shows a situation that afflicts many mutual funds, a condition that frequently proves terminal. Read a primer on how to detect "death spiral" conditions here.

For the Van Wagoner funds, gains during the tech stock frenzy year of 1999 were spectacular for the two then in existence. The Van Wagoner Emerging Growth Fund ( VWEGX) nearly quadrupled that year, vaulting to a gain of 291.15%, while the Van Wagoner Small-Cap Fund ( VWMCX) more than tripled, rewarding its holders with a return of 207.88%.

Then, with the exception of a mildly competitive year in 2003, the funds posted mostly negative signs until this spring. In May of this year, VWEGX jumped 11.14%, while VWMCX advanced 10.95% and the Van Wagoner Growth Opportunities Fund ( VWGOX) posted a one-month gain of 11.31%.

But the near-decade-long gap between the group's displays of brilliance would likely give investors reason to doubt the sustainability of the funds' recent recoveries.

The depressing long-term performance of the funds caused many investors to abandon the group, driving net assets of the individual Van Wagoner funds down to the $3 million to $6 million range. The low asset bases mean investors are saddled with a net expense ratio of 4.76% at VWEGX, 5.83% at VWMCX and a depressing 6.50% at VWGOX. With comparable levels at other funds typically ranging from less than 1.0% to a bit over 1.5%, the levies are setting the performance bar high for the Van Wagoner funds, making it extremely difficult for them to achieve sustained returns competitive with their peers.

Perhaps more discouraging is that the lofty expenses of the Van Wagoner trio of funds are "net" ratios; the actual "gross operating expenses" average more than a percentage point higher.

So unless the funds can generate returns surpassing their bloated expense ratios and keep their returns competitive, they can expect more shareholder defections, which will exert more upward pressure on their expense ratios.

All three Van Wagoner funds list the same top portfolio holdings of Anadigics ( ANAD), with a market capitalization of $770 million, and Asiainfo Holdings ( ASIA), valued by the market at a slim $580 million. ANAD experienced strong gains in April that spilled over into May, while ASIA performed well over the February through May period.

ANAD and ASIA each experienced weakness during the market spill in the second week of June, leaving them below their respective May closes. Thus, the possibility still exists that the Van Wagoner funds could fall into a death spiral.

Van Wagoner Emerging Growth Fund Van Wagoner Growth Opportunities Van Wagoner Small-Cap Growth Fund S&P 500 Total Return Index
OBJECTIVE Growth Small Cap Small Cap -
Inception Date 12/31/1995 3/1/2003 12/31/1995 -
Total Net Assets ($Mil) 3 6 6 -
Net Expense Ratio (%) 4.76 6.50 5.83 -
May 2008 11.14 11.31 10.95 1.29
Latest 3 Months 17.52 17.16 17.28 5.77
Year to Date -12.97 -13.86 -13.34 -3.81
Last 12 Months -21.15 -24.28 -22.76 -6.70
Last 3 Years -5.19 -7.99 -4.59 7.56
Last 5 Years -6.67 -5.73 -5.62 9.77
Last 10 Years -9.34 N/A -2.17 4.21
Calendar 2007 -7.83 -11.29 -9.02 5.49
Calendar 2006 10.84 2.48 6.28 15.80
Calendar 2005 -22.28 -13.11 -12.37 4.89
Calendar 2004 -16.04 -13.66 -15.79 10.87
Calendar 2003 47.22 N/A 37.47 28.69
Calendar 2002 -64.56 N/A -39.68 -22.10
Calendar 2001 -59.70 N/A -40.74 -11.90
Calendar 2000 -20.90 N/A -18.23 -9.05
Calendar 1999 291.15 N/A 207.88 21.05
Calendar 1998 7.98 N/A 13.11 28.57
* Annualized for periods longer than a year.
Source: Ratings - Data as of 5/31/2008.
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Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.