You’ve seen those charts in mutual-fund ads, showing how $10,000 invested at a fund’s launch would have multiplied into a mountain of money over time.
Well, here is a group of charts you aren’t likely to see: At some woebegone funds, that hypothetical initial investment has declined in value — sometimes by half and even more. While these funds usually have had their moments in the sun, they have spent much more time in performance darkness to produce overall negative results since their launches.
The fund with the longest money-losing longevity? It is Ameritor Industry Fund, founded way back in 1959 and still in business today despite a cumulative loss of 42.90 percent, according to fund tracker Lipper Inc. The tiny fund was previously known as Steadman American Industry Fund and is a member of a fund family that for many years was known for poor performance and large annual expenses.
Runners-up in this mostly bad-from-birth competition: U.S. Global Investors Gold Shares Fund, launched in 1970, followed by other precious metals funds introduced in the early 1980s. U.S. Global Gold has delivered a negative 87.8 percent return since inception, according to Lipper, meaning that an initial $10,000 stake now would be down to $1,220.
A look at long-longevity losers serves as a cautionary tale about some individual funds investors may want to avoid. But more than that, it is a reminder of fund fads and once-popular strategies that didn’t pan out for many investors.
Back in the 1980s, for instance, many financial advisers routinely suggested that investors park a small percentage of their assets in gold bullion or mining-stock funds as a hedge against runaway inflation or other financial crises. “That was the non-thinking advice. It was everywhere,” recalls Roy Weitz, publisher of the Fundalarm.com Web site.
Such advice is rare today, after years of far-from-golden results. These days, Weitz says, investing in gold “seems more like a philosophy than an investment.”
Another once-hot category with plenty of since-inception losers: emerging-markets funds, which buy stocks in the developing nations of Asia and Latin America. Such funds multiplied most dramatically in 1994, only to be clobbered by the Mexican peso crisis in December of that year and the Asian financial crisis that unfolded in 1997 and 1998. Numerous emerging-markets funds that appeared in 1994 and 1995 are still in the red since inception even after a huge 1999, when the average emerging-markets fund gained more than 70 percent, according to Lipper.
In hindsight, there is a warning for investors about rushing into a suddenly hot sector. Most of the emerging-markets funds appeared only after one of the category’s best years, 1993. “Funds can come out at precisely the wrong time,” at the tail end of a period of strong results, notes Edward Rosenbaum, director of research at Lipper, a unit of Reuters Group PLC. It can take months to get a new fund up and running, he explains, and by then the hot performance that spurred the fund’s creation may have cooled.
Another type of fund showing up on the longest-losers list: bear-market funds that are positioned to shield investors from, or perhaps profit from, declining stock prices. One of the granddaddies of this category is Gabelli Comstock Capital Value Fund, down a cumulative 18 percent from its start in 1985.
A far younger bear-market fund has posted the absolute steepest-since-inception negative return, according to Lipper: ProFunds UltraShort OTC Fund has declined 96.39 percent since its June 1998 launch, meaning that an initial $10,000 now would be worth only $361. Of course, that is not a big surprise given the fund’s mandate: It aims to move in the opposite direction as the Nasdaq 100 index, and with twice the magnitude. Over the past few years, the tech-heavy Nasdaq 100 has been one of the hottest market measures around.
To be sure, there are few investors who hold any fund continuously from inception. And a negative return since inception doesn’t mean a fund is fatally flawed, or that it hasn’t proved profitable for some investors.
For instance, in market swoons, including the 1987 crash, the Gabelli Comstock fund “has done what it is designed to do, which is to make money,” says Henry Van der Ebb, head of a group of “non-market-correlated” funds at Gabelli Funds, Rye, N.Y. Bearish funds also starred for a while this past spring, when stock-market barometers tumbled.
Still, a long negative record racked up by a fund should give investors pause. In the case of bear-market funds, for instance, it is a reminder that, historically, stocks have gone up more often than down. Bear-market funds will certainly have periods of strong performance, says Scott Wells, a financial adviser in Coral Gables, Fla. But, he adds, “I don’t think people are going to be able to time the market” and get in and out of those funds at the right times.
All told, Lipper counts 491 individual stock funds or stock-fund share classes with negative returns since their inception–6.5 percent of a total of 7,598 vehicles for which the data firm has since-inception results. (Many funds have multiple share classes that differ in their sales commissions and annual expenses.) Not surprisingly, many of the funds are far smaller than they were years ago.
Because relatively few diversified U.S. stock funds are on the list, it is interesting to look at the ones that are. After Ameritor Industry, the oldest such funds with negative results are Frontier Equity Fund, down a cumulative 58.73 percent from its April 1992 start, and Apex Mid Cap Growth Fund, down 9.79 percent from its December 1992 start. One of the best-known managers on the list is Donald Yacktman, whose Yacktman Focused Fund is down 16.09 percent since its launch three years ago, in April 1997.
How do such losing funds manage to hold on to investors? A 1997 page one story in The Wall Street Journal profiled investors who held shares in various Steadman funds for decades, despite their dismal record. Some investors were driven by inertia or an unwillingness to part with fund shares received as a gift for a special occasion. In other cases, the shares had been forgotten and ended up on state unclaimed-property lists.
Today at Ameritor Financial Corp. in Washington, new company president Jerome Kinney, son-in-law of the deceased Charles Steadman, says he and his wife, Carole, are working to turn things around for the three small Ameritor funds. Last month Ameritor hired portfolio manager Paul Dietrich, who also is manager of Dominion Insight Growth Fund. Moving to less expensive offices is one of the steps Kinney says he has taken to trim “horrendous” expenses.
Over the years, Frontier Equity, which invests in volatile stocks of tiny companies, has tended to careen between the top and the bottom of fund-performance charts. Manager James Fay says the fund’s biggest problem has been its “terrible” expenses, recently around 14 percent of assets a year. The fund has less than $1 million in assets, like Ameritor Industry, so fixed costs take a big bite out of investors’ returns.
Suresh Bhirud, manager of Apex Mid Cap, didn’t return phone calls.
At Yacktman Focused, Yacktman says he continues to be enthusiastic about big holdings, including tobacco giant Philip Morris Co. “We’ll have other periods where we will look like rocket scientists, I’m sure,” he says, adding, “But, hey, right now we look like dummies.”
