When bad funds happen to good people

One of the great themes in personal finance is mocking bad funds and, more importantly, the people who invest in them. Silly, performance-chasing investors!

"Striped Skunk" by http://www.birdphotos.com - Own work. Licensed under CC BY 3.0 via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Striped_Skunk.jpg#/media/File:Striped_Skunk.jpg
“Striped Skunk” by http://www.birdphotos.com – Own work. Licensed under CC BY 3.0 via Wikimedia Commons –

But when bad funds happen to good people, those good people often have professional help by their side. Let’s take a look at some unquestionably bad funds. To find them, let’s make sure they underperformed the average fund in their category for the past 12 months, three years and five years. Let’s also make sure that their expenses are higher than funds in their category. And let’s also make sure that the funds have at least $1 billion in assets.

The first fund on the list: Prudential Jennison Equity Income C, a $5.2 billion fund that has gained 13.12% a year — pretty good, until you realize that it has lagged the Standard and Poor’s 500 stock index by 3.33 percentage points a year for the past five years.

But wait, you say. This is an equity income fund, traditionally more conservative than an index fund because it seeks dividend-paying stocks. Valid criticism! But the fund also lags its Morningstar category by 1.82 percentage points a year. Furthermore, you’re paying an average 1.88% a year for not only management’s services, but your broker’s service — because, of course, the C shares are broker-sold shares.

C shares are a way for brokers to overcome the buyer’s objections to A shares, which carry an upfront sales charge of 5.5%. The C shares levy no sales charge, but instead charge a trailing fee of 1% for eternity. But hey! No sales charge! According to Morningstar, the C shares have garnered $111 million in net new investor cash the past 12 months.

Next up: The $5.1 billion Goldman Sachs Growth Opportunities A fund, which has lagged the S&P 500 by 1.01 percentage points a year for the past five years, and its own category by 0.54 percentage points a year for the same period. Expense ratio: 1.36%, very high for a fund that size.

Then there’s the $4.1 billion Lord Abbett Fundamental Equity C fund, which has lagged the S&P 500 by 3.66 percentage points a year the past five years, and its category by 2.15 percentage points a year. The fund charges 1.71% a year for its services, a full percentage of which goes to servicing the account — meaning, mainly, your broker.

Of the 29 funds that fit this particular screen, just six are sold directly to the public, bypassing brokers. (For the record, Gabelli Equity Income leads the race to the bottom for the direct-marketed funds). Now, you can argue that if an adviser put an investor in a lousy stock fund the past five years, that was probably better than a good money market fund or even a good bond fund. And that’s true.

Nevertheless, in a perfect world, a broker would do better than choosing a stock fund that rewarded him handsomely and did ok for his client. Unfortunately, complaints probably won’t start rolling in until the next bear market.

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