With the average stock fund down about 40 percent in 2008, you couldn’t blame investors for hoping that the bulk of mutual funds would simply quit the business and send what’s left back to shareholders.
Alas, just a few hundred funds actually perished in 2008, according to Morningstar Inc., far fewer than died in any other year this decade. Here are the most noteworthy mutual fund passings of 2008:
American Heritage and American Heritage Growth: In 1994, manager Heiko Thieme ran a magazine ad that screamed “Don’t invest in my fund!” American Heritage had been the industry’s very top performer in 1993, which drew a scad of investor assets and publicity just in time for it to hit the skids in 1994. Thieme’s ad said his fund would be a bad fit for anyone who didn’t want “to take performance risks in the pursuit of superior long-term performance.”
Thieme may have pursued that performance, but he seldom caught it. His highly concentrated portfolio of illiquid securities would fluctuate wildly, sometimes suffering double-digit percentage losses in a single day and only occasionally getting that kind of pop in the right direction. At one point, 97 percent of American Heritage’s portfolio was invested in a company making an injectable treatment for erectile dysfunction (just say that aloud and it will quickly come to you how repulsive that idea is). A double-digit expense ratio doomed the fund to double-digit annualized losses.
Yet Thieme — who once compared himself to Fidelity legend Peter Lynch and who was featured in CNBC anchor Bill Griffeth’s 1995 book on “Mutual Fund Masters” — only dabbled in disaster with American Heritage. “Psycho Heiko” (that was his nickname on Wall Street) perfected misery with American Heritage Growth, which he started in 1994. For the record, of all funds operating in 2008, it will be the very worst.
With an expense ratio of roughly 75 percent (that’s not a typo), American Heritage Growth lost 99.95 percent of its value in ’08, until the remaining pennies were liquidated in late August, before the market got really hairy.
SSgA Yield Plus and Evergreen Ultra Short Opportunity: One of the cruelest realities of the current economic crisis has been that even the “safe” investments haven’t always stayed that way. The average ultra-short bond fund is down about 6 percent in 2008, according to Lipper Inc., but these two both lost more than three times that much by the time management pulled the plug back in June. The problem was the mortgage crisis and sub-prime paper, but the real culprit is managers who failed to recognize the potential dangers of stretching for yield. These two blow-ups are a cautionary tale that extra yield is not free; it comes at the cost of additional risk.
THE BLUE FUNDS
The tiny Blue funds — they came in large- and small-cap growth flavors — allowed “progressives” (translation: Democrats) to invest in companies that “act blue” and “give blue.” While they might have thrived under the new administration, they didn’t survive to see it, dying under the old guard after three years of consistent losses.
These funds were donkeys from the get-go, a gimmicky idea with poor follow-through.
How poor? The funds were supposed to be “actively engaging in shareholder resolutions and proxy voting,” and yet a custodial snafu forced the funds to admit that for about a year they never cast a single proxy ballot on “any matter considered at any shareholder meeting.” That was more than 300 missed elections for a fund that was supposed to be all about elections.
Direxion PSI Calendar Effects: This fund spent most of its three-year life not investing, but that was part of the plan of waiting for the right time to invest “based on long-established patterns of institutional investor behavior as driven by and related to accounting periods, tax events and other calendar-related phenomenon.”
It was a goofy premise, but it would have held up well in 2008 simply by being on the sidelines for roughly two-thirds of the days of the year.
Ultimately, this fund’s legacy is it’s gimmick, proving again that management can have a good shtick, but its whizbang ideas don’t always make for good funds.
Polynous Growth: Twelve years old and mostly anonymous, Polynous was a typical small manager trying to build a decent long-term track record. What makes its passing in May notable was the cause of death. According to the firm’s Web site: “Increasing regulatory and compliance costs, ironically inflicted on the regulated Investment Company industry largely due to misdeeds by other unregulated entities in the Financial Services industry, resulted unfortunately in it being increasingly impossible to attempt to run a small mutual fund.”
In other words, Polynous got pushed out of business by troubles stemming from the hedge-fund world, something that could kill more boutique management firms in 2009.
Black Pearl Focus: Manager Kevin Landis was a high-flying media star during the tech boom of the late 1990s, but his Firsthand funds came crashing to earth during the bear market. So Landis started the Black Pearl funds three years ago, presumably to start over without the burden of his past sins. Black Pearl Focus actually was positive over its short life, but Landis was unable to escape his reputation and attract enough assets to make it worthwhile.
Meanwhile, two of his Firsthand funds were merged out of existence in 2008, including Firsthand Global Technology, which opened just after the tech boom peaked and had a cumulative return of -50 percent over the eight years since.
The Van Wagoner funds: Garrett Van Wagoner was one of the most hyper-aggressive managers of the 1990s, building his reputation at Govett Smaller Companies before breaking away from that chart-topper in 1996. He kept the hot streak going in his new shop and money flooded in; a $10,000 investment in Van Wagoner Emerging Growth at the start of 1998 was worth more than $40,000 by early 2000. Assets peaked at more than $3 billion.
And then the bear market turned the whole thing to mud; by early 2008, that $10,000-turned-$40,000 had shriveled to just $4,000, meaning the fund was off 90 percent from the market’s peak.
Blame flew, but the real blame was Van Wagoner’s penchant for private, hard-to-value stocks (which led to regulatory action against him and the funds), and investors buying his great past without realizing how he actually achieved it. Eventually, Van Wagoner merged away his worst funds, started Growth Opportunities (which only averaged a 20+ percent annualized loss until it, too, was merged out of existence this year), and finally folded his operations into the Embarcadero funds. Like Thieme, Van Wagoner proved that it’s easy to top the market when things go just right, but it’s easier still to be miserable the rest of the time, when conditions are far from ideal.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at email@example.com or at Box 70, Cohasset, MA 02025-0070.