Current mutual fund performance charts show, in no uncertain terms, that the lunatics have taken over the asylum.
That’s about the only way to explain how the unlikely duo of Frontier Equity and American Heritage have become the top two funds in the business thus far into 2000.
For a while now, this pair has been neck-and-neck for the dubious distinction of being recognized as “the next Steadman,” fund-speak for being one of the worst funds ever.
That this odd couple could top the charts and, more amazingly, attract money from new investors is both baffling and enlightening. It puts a new twist on the old saw about looking beyond the leader’s table to pick a fund.
The tiny Frontier fund, for example, has an 8 percent upfront sales charge and its expense ratio has topped 19 percent (no, those aren’t typos). That alone makes it a poor investment, though it goes a long way to explaining why the fund’s annual gain over the last five years has been just 4 percent.
The fund has most of its assets tied up in a dozen stocks, including about 7 percent invested in a firm trying to use synthetic pheromones to make a cologne aphrodisiac.
American Heritage, meanwhile, is always in feast-or-famine mode. It has 97 percent of its assets in just two stocks, with three-quarters of the fund plowed into a firm that’s developing an injectable treatment for erectile dysfunction. (Ouch.)
American Heritage gained more than 40 percent in three years of the 1990s, but countered that with five years in which it lost more than 30 percent. Over the last five years, performance has amounted to annualized losses of nearly 5 percent.
This accounts for the fund’s asset dysfunction; it peaked at $150 million in assets in 1993, but has under $5 million left.
Obviously, if the fund world were a meritocracy, where issues survived based entirely on whether they deserved to go on, these funds would have been gone years ago.
But that’s not how the fund world works, and both Frontier and American Heritage persevered to today’s stunning rebounds.
Frontier gained more than 100 percent in 1999. Through the first 10 weeks of 2000, both Frontier and American Heritage were up more than 120 percent. (That’s no typo either.)
Despite their history, money is flowing in.
Now flip the current performance charts upside-down.
There are plenty of big names at the bottom of the heap.
For example, the Sequoia fund, run by some Warren Buffett associates and long considered one of the best funds ever, is off more than 30 percent in the last year. The struggling value fund, closed to new investors for years, still sports a five-year annualized gain of more than 16.5 percent.
In short, some of the worst funds in history look fabulous, while some great funds look like Steadmans.
It’s enough to make any observer believe that lunacy reigns.
“There is no question that if Sequoia were open, nobody would buy a share and that people who look at the numbers today would think that Heiko is gifted and the guys at Sequoia are brain-dead,” says money manager Michael Stolper of Stolper & Co. in San Diego. “The numbers have a way of fooling people.”
The moral in this story is to consider how any performance record, good or bad, is made. Look past the leader board and examine what is driving the results and get a good understanding of how a fund works.
Both Frontier and American Heritage, for example, are driven by having portfolios so concentrated that they can move 10 percentage points in a week. In fact, both did just that recently.
If you can’t get a good explanation for why a fund is doing so well, look at long-term performance and consider whether it’s worth the risk that today’s hot fund could be tomorrow’s “new Steadman.
———-
Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached at The Boston Globe, Box 2378, Boston, Mass. 02107-2378 or by e-mail at jaffe@globe.com.
