When it comes to investing, there are times when boring is good. Such as when the idea is to find a safe haven in a fund that does a simple...

Share story

When it comes to investing, there are times when boring is good.

Such as when the idea is to find a safe haven in a fund that does a simple job, the kind of fund you can hold without fear of what happens the next time you look at your statement. For over a year, however, investors who have parked money in ultrashort-duration bond funds have come away feeling like their investment vehicle has been vandalized while their cash was parked.

Over the last year, the average ultrashort bond fund is off 1.66 percent, according to Lipper. So far this year, the situation is uglier, with the average fund in the category losing about 2.2 percent of its value.

For some funds, damages have been far worse. SSgA Yield Plus (SSYPX) was off nearly 30 percent in 12 months. Schwab YieldPlus (SWYPX) lost 28 percent of its value, and Fidelity Ultra-Short Bond (FUSFX) took a 12.8 percent haircut.

For an ultrashort bond fund, that’s as ugly as it gets. The cause of the problems should be obvious even to casual investors, namely the subprime credit crisis. The troubled ultrashort funds typically hold a big slug of asset-backed securities tied to the performance of the housing market.

When the housing market went into the tank, it took housing securities with it. Many institutional investors who had bought similar securities — including some hedge funds — had to either sell their paper or shut down.

They opted for the former and flooded the market with notes, dropping prices even further.

Mutual funds must “mark to market” every day, meaning they determine their price by figuring out what they could get if they had to sell everything in the portfolio at current prices.

With the value of the ultrashort paper falling, the net asset values of the fund went along for the ride.

That, in turn, prompted fund investors to pull out, which made the situation even worse for some of the Yield Plus type funds.

Managers have no choice but to meet redemption requests. If the money going out exceeds cash coming in, securities must be sold.

In ordinary times, it’s no big deal, but with sellers flooding the market with this questionable paper — eroding its value that much further — managers who have been forced to sell have effectively locked in their losses.

In the funds with the biggest losses, many remaining investors probably don’t want to be the last ones out the door.

On the one hand, if the fund can avoid selling securities, the investor can hope that as time passes, the paper stays out of foreclosure or default and the fund comes out whole.

On the other hand, there’s a good chance that fellow shareholders will bail out and leave you holding the bag.

With the financial crisis yet to play out, be sure your next parking spot is a safe one, and consider looking for returns that are a bit more boring.

Chuck Jaffe is senior columnist at MarketWatch. He can be reached at cjaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.