Chuck Jaffe: A few of the new inhabitants of the mutual-fund dead ppol should be memorialized, lest investors repeat those mistakes in the future.
Mutual funds die in silence, rejected, abandoned and mostly unnoticed.
You’d feel bad about it except that most funds liquidated or merged out of existence have earned the big dirt nap. Typically, about 1,000 traditional funds and exchange-traded funds snuff it every year, a motley mix of uninspired, goofy, mediocre and dumb ideas with some marketing failures and a few decent-but-unloved performers thrown in.
No one should mourn the loss of a fund, but before we go whistling past the mutual-fund graveyard, a few of the new inhabitants there should be memorialized, lest investors repeat those mistakes in the future. With that in mind — and in the spirit of year-end retrospectives about famous people who’ve died in the past 12 months — it’s time to dip into the year’s dead pool for tales from the mutual-fund crypt.
Among the funds that passed in 2018:
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The Gabelli Mathers fund shuffled off this mortal coil in late August after 53 years as a terrible fund with, in some ways, a good record. “Best of the worst” is a weird legacy, but Mathers was a weird fund, building a reputation from its 1965 beginnings for succeeding when others failed.
That was never more evident than in 1987, the year of the Black Monday market crash, when Mathers gained 27 percent to top the growth-fund charts. It ranked first again when the market sagged in 1990; in 2008, when the Standard & Poor’s 500 lost 37 percent, Mathers ranked first again with a 0.2 percent gain.
As good as Mathers was when the market tanked, that’s how bad it was when the market was on the rise.
Thus, when liquidation plans were approved in June, the fund had an annualized loss for the last 15 years of 4.72 percent, compared with the S&P’s gain of 9.2 percent. A $10,000 investment in the fund when it opened in 1965 was worth $195,153 by Dec. 31, 2017; the same amount invested in the S&P 500 was worth $1.48 million.
The one thing that did change about the fund’s performance over the years was how it was categorized. Mathers was a “growth fund” on Black Monday, a “general-purpose fund” in 1990, and a “conservative-allocation fund” in 2008. At the end, however, it was an “active bear-market fund,” according to Morningstar, and was the top fund in that peer group over the five-, 10- and 15-year periods before its death.
Mathers proved that it’s possible to mix years of what ratings agencies consider “top performance” with actual losses in the portfolio, a legacy that should prompt investors to look beyond the labels when evaluating funds.
LocalShares Nashville Area ETF proved that those who can’t remember the past are condemned to repeat it. As its name implied, this fund invested only in companies based in and around Music City, making it more for hometown fans than investors.
The Nashville fund opened shortly after OOK and TXF — short-lived ETFs with strategies centric to Oklahoma and Texas respectively — closed. Thus, when you memorialize the fund in song, the chorus goes like this: “LocalShares fought the law [of bad fund ideas] and the law won.”
Political funds fall
No matter which political party you identify with, it’s easy to feel these days like politics aren’t working. That’s proved true with funds as both the Democratic Policies ETF (DEM) and the Republican Policies ETF (GOP) shuttered just six months after they opened. For those keeping score, neither fund got much past $1 million in assets, but the Republican fund generated a total return of 8.62 percent over its six-month existence, compared to 5.47 percent for the Democratic fund.
PIMCO RealPath funds, an entire family of target-date funds, shut down in February after a decade of lousy sales and worse performance. It really didn’t matter if you had the 2020, 2025, 2030, 2035, 2040, 2045, 2050 or 2055 flavor, these funds never really had a chance to do the job well.
Funds that thrive in the target-date space tend to be passively managed, low-cost, stick-with-it-forever funds, and PIMCO RealPath funds were actively managed, with above-average costs.
Moreover, “real” in a fund’s name suggests something built to succeed during times of high inflation; that never happened during the family’s undistinguished life cycle.
Direxion iBillionaire Index ETF closed in April after nearly four years of trying to buy the same stocks that the 10 most successful billionaire investors or institutional investment managers invested in. This nice idea started as a mobile app (which continues on today), but interesting smartphone content didn’t translate into a great fund; no one became the next iBillionaire on a total return of under 9 percent in three-plus years.
RSQ International Equity (RSQVX) created some buzz when it was launched four years ago. Managers Rudolph Riad-Younes and Richard Pell had run the Julius Baer International fund as it more than doubled its average peer from 1995 up to the start of the financial crisis in 2007. Even after that fund lost nearly two-thirds of its value in the crash, it was still a better long-term performer than its peers.
When the Baer fund struggled post recovery, the managers set out on their own. RSQ investors were hoping for a return of the magic that never came; the management duo split up in 2016 and the fund was on life support from then until the plug was pulled in late October.
Rule One Fund was stillborn in 2018. The fund was supposed to follow the money-management style of Phil Town, who runs Rule One Investing. Rule #1, of course, is “Don’t lose money,” and management apparently decided that opening the fund might break that rule, so they pulled the plug in November before operations ever commenced.
LJM Preservation and Growth Fund almost closed itself with the worst two-day stretch of performance in fund history in February. A spike in volatility resulted in a backfire in the fund’s strategy of playing the CBOE Volatility Index, resulting in the fund losing 50 percent of its value twice in two days.
Say that aloud and it actually sounds like the results should be worse than the 82 percent loss that shareholders suffered. Assets of $805 million in January were less than $10 million by March, when the fund shuttered.
Management closed up shop shortly thereafter, but the specter of this fund will live on in lawsuits and class-action cases for years.