Fidelity and Vanguard may have avoided the stench of recent scandals, but they couldn't escape the ire of one investment adviser or his quarterly Hall of Shame listing the worst mutual funds in the country. The Fidelity Destiny 1 fund and the Vanguard U.S. Growth fund are two of 15 funds that Adam Bold, founder and CIO of Overland Park, Kan.-based The Mutual Fund Store, a fee-based investment advisory firm, has singled out as being worthy of such a notorious distinction.
Bold, also the host of "The Mutual Fund Show," a radio talk show that airs in several markets including Chicago and St. Louis, inducts funds that have had recent poor performance as well as consistently sour returns over an extended period of time. Fees are not a factor in his decision. "The amazing thing to me is not that there are bad funds out there but that there is so much money in bad funds," Bold said. "Billions and billions of dollars are being wasted away in absolutely awful mutual funds."
The "Vanguard U.S. Doesn't Growth" fund, as Bold calls it, is a large-cap growth fund with $6.4 billion in assets as of Oct. 7. Year-to-date, it is down 1.32%, and has gained 3.36% on an annualized basis in the trailing year, Bold said. However, in the last three years, the fund has lost 3.39% and in the trailing five years, it has dropped 12.92%. However, over the last decade, the fund had gained 5.09% annually.
"The Vanguard fund surprises me," Bold said. "They changed management on the fund and it's still a big piece of junk." A new fund portfolio management team took hold in April.
An investor who put $10,000 into the fund 10 years ago may be happy that they have earned $6,400 over a decade, but Bold says the profits pale in comparison to other similar funds. "That same $10,000 in the Excelsior Value & Restructuring fund turned into $42,827 during that same time frame." Vanguard did not return calls seeking comment.
As for Fidelity, the Destiny 1 fund, largely sold to military personnel, has lagged behind the market significantly in the last 10 years. The structure of the fund also maintains that the selling agent gets 50% of the first year's contributions, which translates into approximately an 8.5% load, Bold estimated. "Here's a fund with $3.2 billion, most of which belongs to people who are putting their lives on the line to protect this country, and they've lost 8% a year for the last five years and made about 50% of what the overall stock market has made over the last 10 years. And if you take the load into effect, it probably eats up that whole return."
A Fidelity spokesman was quick to point out that the current manager, Karen Firestone, only took the helm of the fund in 2000, while noting her more than 20 years of portfolio management experience at Fidelity. She was also an assistant to Peter Lynch. "It's a fund that's focused on large-cap growth stocks that have not been in favor for the last several years. We're confident in her abilities, and we believe when the market swings towards favoring a large-cap growth perspective, it will be reflected in the fund's performance," he said.
The list is not exclusive to larger funds, however. "The worst of the bunch is the Frontier Equity fund," Bold said. So far this year, it has lost 24.14% and has dropped a whopping 35.24% over the trailing three years and 39.61% over five years. The 10-year history of negative 29.82% on an annualized basis is not much better. "It only has $1 million in it, so there aren't many people affected by it, but it's just so horrifically bad that I don't know why it still exists. If this were a horse, it would be glue by now."
A spokeswoman for the fund said it has been in a period of transition and that the advisor has taken steps to correct performance issues. It was originally set up in 1992 by Jim Fay as an investment for his clients, but since his death in 2002, new management has taken over the fund. In addition to a new manager, the fund has a new research analyst. Liquidation of the remaining assets was a consideration when Fay died, but those remaining felt they could "bring back" the fund, she said. Further, it holds value, regardless of performance, she insisted, because of the costs associated with starting up a fund.
Another Kind of Scandal
The large asset pools in the funds on the list further reflect the conflicts of interests in the brokerage community and clearly illustrate that some are shirking their fiduciary duty in order to line their pockets with green, Bold said. "A lot of these are load funds," Bold said. "If I'm a broker and I recommend the Putnam OTC & Emerging Growth fund to a client and it's been as bad as it's been, at some point I owe them a phone call to say that while there was a rationale for me recommending this fund, it hasn't worked out."
To address issues, including performance, Putnam said it has recently realigned certain investment teams, including the one overseeing the OTC & Emerging Growth fund, to create better synergies of its small-cap research, execution and portfolio construction, and Rick Weed is the new portfolio leader.
Bold, who has been putting funds to shame since 1998, said sometimes shops stay on top of poor performance and are quick to take action to turn the tide. However, the Vanguard U.S. Growth, Fidelity Destiny 1, Putnam OTC & Emerging Growth and the Frontier Equity funds are all chronic offenders. "If these companies were really compassionate and caring about their customers, they would just shut the funds down. [They] could basically care less about their customers as long as they get their fees."