Some of the mutual fund giants are the hubs of the worst-performing mismanaged bond and equity funds, and it is time for investors to take their money elsewhere, according to Doug Fabian, in his fourth quarter 2002 lemon list.
"There are certain fund companies I have seen as repeat offenders," said Fabian, editor of "Successful Investing," a 25-year-old investment advisory service. He named the Fidelity Adviser Funds, the firm's load funds, AIM Funds (specifically the AIM Premier Equity and AIM Balanced funds), Dreyfus, American Express and Alliance all as chronic offenders, among a host of others in the industry.
"We've been in a bond fund bull market," Fabian said. "If they can't make money in a bull market, they perform really badly in a bear market. We wanted to give investors a heads up."
To attain "lemon" status, a fund has to chronically underperform similar funds in the same peer group, lagging behind the pack by a minimum of 25% in the last year and consistently coming up short over the trailing three and five years. The lemons are scaled against the Lipper analytical average for each fund class. A total of 811 funds have achieved the notorious plateau in the fourth quarter report, totaling about $206 billion in assets. Of the 811, there are 432 equity funds on the list with a five-year track record for dismal performance.
"Investors need to do the hiring and firing, and when you leave a fund, you are firing the manager. I am encouraging investors to fire the 811 managers of the funds on the list," Fabian said.
Also included in the list are 240 funds that Fabian terms bear market newcomers - funds that have not yet been around for five years, but have chronically disappointed investors "It's important to identify these three-year fund losers because many people are still holding onto funds that have lost as much as 70%, hoping they will come back," Fabian said, noting the large number of funds to appear on the scene in 2000. "My advice is don't wait to sell these losers - upgrade to a better-performing fund."
New to Fabian's celebrated lemon list this term are bond funds, with 139 fixed income funds singled out for not making the grade. They all were at least 25% below their peers over the last year and were ranked in order of asset size, because the larger the assets, the more people the lemons affect, Fabian reasons. And while many on the top 10 worst lemon list for bonds may not look bad at first glance, Fabian said it is important to keep the numbers in perspective in relation to their peers.
The top offender, the Bond Fund of America, which has $12.35 billion in assets, has an annualized one-year return of 6.15%, which lags behind the A-Rated Bond category's average of 8.57%. That's 28% below the average. For the past three years the same fund has lagged behind its peers by 26.9%, while only coming up 14.6% short over the past five years.
"Underperforming funds tend to stay underperforming," Fabian said. "I've yet to see a lemon turn into a five-star performer."
To illustrate his point, Fabian showed us how much money an investor would have had they put it in an outperforming fund versus one of his lemons. If an investor with $100,000 put his money into the Pioneer High Yield Fund three years ago, today he or she would have more than $128,000.
However, if that individual invested in the Fidelity Adviser High Income fund instead, one of the top lemons on the list, that same $100,000 would have dropped to $84,337 in the same time span, a $43,781 reduction in principal, or a -34.17% return. Both funds have the same objective.