Morningstar analysts have been having a little debate lately. When it comes to dumb fund launches, which decade was the worst: the '90s or the soon to be history '00s?
We disagree along generational lines. The old guard, led by our vice president of research John Rekenthaler, contends fund companies have yet to retest the low standards for mercenary fund rollouts set in the last decade of the previous century. Analysts of more recent vintage, including me, find it hard to imagine a time of greater cupidity than the decade that's about to close out.
When it comes to fund analysis, John has forgotten more about funds than many industry watchers know. But he's wrong on this one. The noughties set new records for dubious, trend-chasing new funds.
The leisure-suit era
The '00s had the leisure suits of fund launches. The tech and growth
stock bubble inflated in the '90s, and fund companies had launched
Internet, tech, and biotech funds before. But the mania reached its
apogee in 2000. Never were so many specialised funds launched at so
wrong a time. Most of those funds now lie piled in history's drawers
like snapshots of you in gaudy, flared pants and matching waistcoats
with lapels as big as F-15 wings. Every now and then someone excavates
one and you have to say, "Hey, everyone dressed like that. It seemed
groovy at the time." I bet a lot of fund company executives are saying
something similar about their tech funds. Few lived on, but the memory
of some will endure in infamy.
Hotshot venture capitalist and author Steve Harmon started Zero Gravity Internet, named after his book, in May 2000 but left the fund five months later. Ultimately, it closed at the end of March 2001, down nearly 60% from inception.
How do you exploit two hot trends--in this case, the Internet and mapping of the human genome? Easy. Slap a .com suffix on a biotech fund--like GenomicsFund.com did--and you can have it both ways. Months after its March 2000 launch, the fund issued a news release touting its debut as a top performer. Years of abysmal results and management, strategy, and name changes ensued. The fund became a small-cap fund and finally died with a whimper and without a news release earlier this year.
B2B funds sprouted because companies using the Web to facilitate business between businesses (thus B2B) were purportedly going to rule the New Economy. Amerindo Internet B2B, however, was merged away three years after its May 2000 launch when managers Alberto Vilar and Gary Tanaka were arrested for stealing from their clients. The fund lost a cumulative 70%, and Vilar and Tanaka were convicted of money laundering and fraud.
The most hubristic launch of that era, however, was Merrill Lynch Internet Strategies'. Nine days before the Nasdaq's peak, the firm held a pep rally featuring the then-unrepentant Net stock tout Henry Blodget and fund manager Paul Meeks, who howled "Let's get ready to rumble!" like boxing-ring announcer Michael Buffer. Internet Strategies gathered more than $1 billion in a subscription period and then imploded.
When the principal is not your pal
The sheer madness of the tech bubble makes the rest of the decade seem
tame, until you take a closer look.
After missing the top, Merrill Lynch missed the bottom. It launched a series of principal protection funds in 2002 just as the 2000-02 bear market hit bottom. ING's Principal Protection funds, some of which came at the same time, took a bad idea and made it worse. Peddling funds that promised downside protection two years into a down market was classic rearview investing. Plus, the funds just were a bad deal. They charged high expense ratios and sacrificed upside potential in exchange for a guarantee of principal preservation. In the end, US Treasury bills did better than the funds over their lifetimes. BlackRock, which now advises the Merrill Lynch funds, is in the process of sweeping them under the rug. Some of ING's principal protection funds endure, like a bad memory.
Robert Markman knows about mistimed launches. He started his Markman Global Infrastructure Build-Out on September 15, 2008, the day Lehman Brothers filed for bankruptcy, Bank of America bought Merrill Lynch, and the financial system went critical. Not a great moment to initiate a fund with more than 70% of its assets in economically sensitive industrial-materials stocks. It didn't last a year.
Silly season
Bad timing wasn't everything in the '00s. There were just plain silly
ideas, too.
The hipper-than-thou Thrasher Funds' Gendex fund didn't just want to make money, it wanted to be cool and chic, too. It claimed to be "managed by young adult investors, for young adult investors." For a fund that stressed youth and fashion, though, it followed a formula that would make a 50-something fund industry executive proud. It was a demographic story repackaged as an investment discipline, similar to the defunct AIM Dent Demographic Trends. At least that fund's strategy was based on the author Harry Dent's theories. Gendex used fuzzy notions of Demographic Convergence, which amounted to buying consumer companies serving Baby Boomers and Generations X and Y. But both cohorts had maxed out their credit cards. When the economy tanked after Gendex launched near the stock market's October 2007 peak, so did this fund's thesis.
The kids didn't have all the fun. The Congressional Effect Fund follows a strategy that a cranky, old gadfly could have dreamed up. It pulls out of the stock market whenever Congress is in session, because the fund's manager, Eric Singer, says the stocks do better on days when lawmakers aren't in session screwing things up. I don't doubt legislators' abilities to cause more problems than they fix, but an investment strategy based on their venality and ineptitude is questionable. Singer has data going back a whole 44 years to support his thesis. That's just a subset of the 200 years of stock market returns that Wharton professor Jeremy Seigel used to back up his claims in his book Stocks for the Long Run, and people still doubt him. Data miners have found connections between equity returns and hemlines and between the Super Bowl and butter production in Bangladesh, but nobody's launched an investment strategy based on them. If they have, they should be on this list.
Bad fund ideas, like politics, make strange bedfellows. Joining the Libertarian-themed Congressional Effect Fund on the list of shame is the bleeding-heart liberal Blue Fund, as in Blue states. It was going to invest only in companies that embodied progressive values and gave money to Democratic candidates. It was never as popular as President Obama, and its returns plunged like his recent approval ratings.
The '90s had the oxymoronic StockJungle Community Intelligence Fund, but the '00s still have Marketocracy Masters 100, which gets its investment ideas from hypothetical stock portfolios maintained by members of the Marketocracy.com investing site. It does some quantitative vetting of the picks, but its results since its May 2001 inception are mixed--ahead of the average large-cap fund and the S&P 500, but behind the typical mid-cap blend fund and benchmarks that own more small caps like it does. It's still an experiment, and with a 1.95% expense ratio, an expensive one.
Extraterrestrial funds
Exchange-traded funds have been the real wild west of fund launches in
the '00s. Almost anything has been fair game: sectors, industries, index
weighting schemes, bonds, commodities, leveraged strategies, currencies,
and quasi-active and active management. While there have been some
interesting and useful innovations, there also has been a lot of dreck.
Perhaps the best examples were the HealthShares ETFs and StateShares.
HealthShares were short-lived and small but typified the
throw-it-at-the-wall-and-see-what-sticks mentality. In 2007,
HealthShares rolled out nearly 20 ETFs focused on concepts such as
cancer, ophthalmology, and dermatology and wound care. The funds shut in
2008. There were going to be 50 StateShares tracking the biggest
publicly traded companies in each state in the union. They never really
got off the ground, but don't fret, Okies, for another firm launched an
ETF focused just on Oklahoma stocks, the OOK
ETF.
I've barely scratched the surface of '00 stupidity. But even Rekenthaler, who is the Leonard Pinth Garnell of finding bad investment ideas, would have trouble topping this list. Go ahead. Top my decade.
Click here for John Rekenthaler's Top 10 nonsense funds of the '90s.
