Chuck Jaffe: Lump of Coal Awards go to fund-industry fumblers
BY CHARLES JAFFE Market Watch
Wednesday, December 12, 2012
12/12/12 at 3:26 AM
In the best of years - and 2012 will go down as a pretty good one in terms of the mutual fund industry - most investors are willing to overlook misbehavior and overt bumbling so long as it doesn't directly show up in their account statement.
They shouldn't be so nice to the naughty.
With that in mind, here are the 17th annual Lump of Coal Awards, my holiday tradition of easing Santa's burden by singling out the bad boys and girls of the fund industry who deserve nothing more than a lousy lump of lignite in their Christmas stockings this year.
Bad results alone do not ensure a booby prize. The awards recognize fund-industry fumblers for action, attitude, behavior, execution or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.
And the losers are:
- Grant Park Managed Futures, for suggesting that investors pay no attention to the man behind the curtain.
Managed-futures funds are a fast-growing category, and about three dozen funds invest with commodity trading advisers, or firms that manage underlying pools of commodities. Those firms typically charge expenses like a hedge fund, meaning 2 percent for management, plus 20 percent of performance.
Put these investments into a mutual fund, and there's another layer of costs; worse yet, due to some arcane fund and tax rules, the Securities and Exchange Commission never required these funds to disclose their underlying hedge-fund-like costs.
Grant Park has stopped disclosing any reference to its underlying management and performance fees. That lack of disclosure "cut" the fund's expense ratio from 3.55 percent in its January 2012 annual report to 1.97 percent in its September 2012 prospectus. Instead of being transparent and showing investors the inside costs, Grant Park went all the way to invisible, with no mention of the underlying costs whatsoever.
The costs are still there, of course, but you can't see what's behind the curtain. I don't think we're in Kansas anymore.
- The Patriot Fund, for using both patriotism and terrorism as marketing tools.
Started early this year, the fund erroneously claims to be "introducing terror-free investing" to the fund world, avoiding investments in companies doing business with nations identified by the State Department as sponsors of terrorism.
The Patriot Fund's rhetoric includes mentions of North Korea, but the official list covers just Iran, Syria, Sudan and Cuba.
Strip the rhetoric and you've got a strategy of buying domestic companies that honor the U.S. embargoes against those nations. This covers more than 90 percent of the market cap of the Standard & Poor's 500. It's hardly like most domestic funds are somehow "terror-filled," which is the insinuation made by the terror-free label.
Say what you will about Apple, Google, Mastercard, Foot Locker and many others - all holdings in the Patriot Fund - but no one truly considers them "terror-free" stocks or even thinks about the "plus" of not doing business in, say, Sudan. Thus, the play here is all about emotion, turning patriotism and terrorism into cheap gimmicks.
- Permanent Portfolio Short-Term Treasury, because a bond fund shouldn't make shareholders envious of money-market returns.
A short-term U.S. Treasury fund doesn't have to win big, but it shouldn't lose money when rates aren't volatile - for four years in a row. Permanent Portfolio Short-Term Treasury has lost 2 percent over the past five years, making it the worst performer in its peer group, according to Lipper Inc. The second-worst performer is up over 7 percent over the same span.
Suggesting that investors use a money-market fund instead is akin to asking them to settle for nothing. But considering that, this fund is worse than nothing.
Original Print Headline: Lump of Coal Awards go to fund-industry fumblers
Chuck Jaffe, senior columnist for MarketWatch, can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
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