BOSTON (MarketWatch) — Just because investment returns are nicer than last year doesn’t mean there hasn’t been plenty of naughty behavior in the mutual-fund world in 2009.
Now those bad actors get their comeuppance. It’s the 14th annual Lump of Coal Awards, my two-week holiday tradition of easing Santa’s burden by pointing out the bad boys and girls of the fund industry who deserve nothing more than a sooty chunk of carbon in their holiday stockings this year.
The Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-industry fumblers for action, attitude, behavior, execution or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.
With the average diversified stock fund up nearly 27% this year, you might think it would be hard to lob stink bombs at the fund industry now, but there is never a shortage of blundering buffoons and arrogant, investment miscreants.
The 2009 Lump of Coal Awards go to:
TCW Group
When Los Angeles-based TCW agreed this month to buy rival bond fund manager Metropolitan West Asset Management, it whacked its chief investment officer, Jeffrey Gundlach. Trouble is, Gundlach put the firm on the map. As perhaps the best-known bond-fund manager this side of Pimco’s Bill Gross, he was the reason many investors picked TCW in the first place.
TCW officials said Gundlach was canned because he threatened to leave and take his team with him; Gundlach said he only talked about leaving after learning he’d be forced out. Meanwhile, investors have pulled millions of dollars, and more will leave when Gundlach and his new team set up shop. If TCW bought its cross-town rival to establish a dominant presence in bond funds, it needed to keep its dominant name in the lineup. Instead, the company tried to convince shareholders that the deal was a good thing, when they had just lost their star manager.
American Century
In January, American Century changed managers on its international bond fund , replacing a team from JP Morgan Asset Management with John Lovito and Federico Zamora, experienced managers who had worked for Lehman Brothers.
While praising the new guys, American Century never said a word as to why it made the change; seeing as the previous management team had delivered performance in the top 25% of its peer group for the three- and five-year periods ending in 2008, shareholders deserved an explanation. This year, the fund is below average in its peer group.
Vanguard Group
Vanguard filed the paperwork on a host of new exchange-traded funds in mid-November. Unfortunately, the prospectus for Vanguard Short-Term Corporate Bond actually got the fund’s ticker symbol wrong. No one caught it in registration, and the fund had to file a prospectus sticker at the start of December to correct its mix-up. When management and fund lawyers can’t even get the ticker symbol right, you have to wonder what else they can screw up.
PowerShares
When an exchange-traded fund is registered, it is established with a fixed number of shares to issue; as the fund approaches that limit, it submits a form to regulators and typically gets quick approval to issue more shares. This is Fund Operations 101.
Yet as PowerShares DB US Dollar Bullish Fund’s assets rose from $350 million at the end of August to $500 million a month later and to $730 million by Halloween, PowerShares sat still immediate payday loans online.
The firm only filed its paperwork to issue more shares the first week in November, by which time the flow was too great; the fund hit $880 million in assets — exhausting its allowed 40 million shares — and had a stretch where it was unable to function normally and issue more.
AMIDEX Cancer Innovation & Healthcare Fund
This tiny fund is a specialized play on the health-care sector, but its approach has proven hazardous to investor wealth.
For starters, there’s the 5% expense ratio (no, that’s not a misprint). Then, nearly half of the fund’s assets haven’t gone to cancer-related biotech stocks, but rather into a Fidelity money-market fund. Since money fund yields are less than 0.5% — and the fund’s expenses outweigh that by a factor of 10 — it means that management is letting shareholders take a loss on about half of the money they invest with the fund. That’s bad medicine.
Sprott Asset Management
Mutual funds in Canada have some of the highest costs in the civilized world, with “managed expense ratios” typically running in the neighborhood of 2.5%. Of that amount, 1% is typically a “trailer fee” paid to advisers for ongoing service, or simply to keep clients invested. It’s akin to a 12b-1 fee in America, only higher and often unavoidable; even do-it-yourself investors find they can’t buy share classes that waive the fee and can’t get the money back even though they deserve the cash themselves for acting as their own adviser.
In September, to combat this issue, Questrade announced a “Mutual Fund Maximizer” service that rebates trailer fees to do-it-yourselfers. Sprott Asset Management responded to this move by refusing to rebate the fees to Questrade and wouldn’t allow Questrade customers to buy, swap or transfer Sprott funds. The only remaining option for Questrade customers was to sell Sprott funds; let’s hope they did just that.
ProFunds
The hottest topic in the fund world in 2009 may have been leveraged and inverse ETFs, which are designed to deliver a multiple of an index return over a single day (the market moves 1%, the fund moves 2 or 3 points with it or against it, depending on the bet you place). These funds are built to be traded; hold them beyond a day and technical factors guarantee big tracking errors, so that your results will vary widely from what market returns would lead you to expect.
Regulators have warned average investors to leave these funds to the traders and pros. Most fund firms — even those in the leveraged ETF biz — agree; ProFunds has said as much itself. But in September, Joanne Hill, head of investment strategy for ProFunds, gave a Webinar called “Setting the Record Straight: Achieving Success Beyond a Day With Leveraged and Inverse Funds.”
Suffice it to say, the research in that presentation, now widely disseminated, pooh-poohed the concerns and gave every ordinary investor a reason to try financial crack. A few days of success can be addicting, but this story will end badly for investors who don’t know precisely how to use these complex funds.
“emphasis”> Coming next week: Legal action and inaction, big-name blunders and the Lump of Coal for “Mutual Fund Mismanager of the Year.”
Chuck Jaffe: Naughty funds get lumps of coal