NEW YORK -- How bad is Steadman Security Co. at managing mutual funds?
"Wretched," said Don Phillips, publisher of Chicago-based Morningstar Mutual Funds, which gauges the performance of mutual funds. "It is almost farcical that someone can produce results that are so consistently bad."
"If they aren't the worst, they're a serious contender," said Bob Powell, editor of Mutual Fund Marketing News, a newsletter based in Boston.
Steadman runs three closed-end funds and one open fund, with varying investment aims. All of them have done badly by just about any measure.
"You can't do that badly forever," Mr. Powell said. "At some point, the shareholders are going to redeem."
You'd think so. But the Steadman funds have been performing pretty badly for a long time now. Two of the funds ranked dead last within their investment category in returns to investors for the past 10 years to Sept. 30, according to Lipper Analytical Securities Inc. The other two belong to the same category, where one ranked last and the other next to last in returns over the past 10 years.
Specifically, the Steadman American Industry Fund lost 59.45 percent of its investors' money, ranking 46 out of 46 capital appreciation funds, Lipper said. The average fund in that group returned 232.15 percent. Morningstar analyst Angela Tenga said July 1993 the American Industry Fund was "arguably the worst fund covered by Morningstar."
The Steadman Associated Fund -- the only one still open to investors -- has returned 18.06 percent, Lipper said. It ranks 20th out of 20 equity income funds. The average equity income fund returned 216.11 percent.
RTC The Steadman Investment Fund clocked in at a 22.31 percent loss and ranked 127 out of 128 growth funds. Its sister growth fund, the Steadman Technology and Growth Fund has done even worse: a loss of 72.20 percent, ranking 128 out of 128. The average growth fund returned 254.79 percent.
During those 10 years, the American Industry Fund's assets have declined to $1.8 million from $9.4 million. The Associated Fund assets are down to $6.3 million from $25.1 million. The Investment Fund has shrunk to $2.6 million from $10 million, the Technology and Growth Fund to $1 million from $6.9 million.
"This is such an exception to the rule," Mr. Phillips said. "Most funds have gained in assets over time."
Most have also performed better. It's hard to say why the Steadman funds have done so badly. Presumably, picking bad stocks is the main reason, but it's not the only one. "Much of the poor performance has been due to very high expenses," A. Michael Lipper, president of Lipper Analytical, said.
Expenses as a portion of assets in Associated and Investment translate to 5 percent and at least twice as much at American Industry and Technology and Growth. In the fund business, a fund's return is often diminished if the investment carries a high expense ratio, which is what shareholders pay for fund operating expenses and management fees, expressed as a percentage of total investment.
The funds' performance has not gone unnoticed. The Securities and Exchange Commission has twice taken action against Charles Steadman, the company's chairman and chief executive.
In 1977, the SEC charged that Mr. Steadman should have disclosed insider transactions in which he shifted fund assets to banks that could give him personal loans. An appeals court ruled in 1979 that the SEC had failed to prove the motive by the banks.
A decade later, the SEC tried again, claiming the company had not paid registration fees in some states. Again, it failed.
Why continue? Why invest?
"Why is Steadman still in business? Because the SEC can't put them out of business. What it says about the SEC is that these government regulatory bodies don't have a lot of authority," Mr. Phillips said.
So why do people still have their money in a Steadman fund? "They're afraid to cut their losses," Mr. Powell said. "At this point, they're wondering how much lower it can go and they hope a fund can turn. Psychology indicates that a sale shows an admission of a mistake, and investors hate to admit that they made a mistake."
Actually, a fair number of Steadman's investors have admitted it. At the end of the 1980s, the funds had about 26,000 investors, little more than a third of the 75,000 it had at the beginning of the 1970s.
The dates are significant. Until 1971, shares in the Steadman funds were sold through sales offices located throughout the U.S. All the funds were registered under the laws of the states in which their shares were sold.
That year, the directors of the funds changed the way they did business. The sales offices were shut down and the company's investment products became no-load mutual funds, which were, that time, relatively rare. Most sales were made by mail order.
It's not clear why Steadman made the shift. Charles Steadman, the chairman and chief executive, won't discuss the matter. Nor will he discuss his funds' performance or the problems with their investments or anything else. Phone calls asking for his comments go unanswered.
Max Katcher, an executive vice president with Steadman, said his boss shuns reporters because "whenever a story comes out, it is negative. I don't blame him." Then he hung up.
A shadowy figure
To Mr. Steadman's peers, fund executives, both he and his funds are something of a mystery. "I don't know if I've ever met anyone from there," said Jon Fossel, chairman of the Investment Company Institute, the fund industry's main trade association, and the chairman of Oppenheimer Management Corp., which manages about $29 billion.
"They haven't put out an active prospectus in a long time," said Mr. Lipper of Lipper Analytical, who has been following the fund industry for three decades. "I haven't met with him in years."
According to Financial World magazine, Mr. Steadman is an 80-year-old Harvard Law School graduate and a native of Falls City, Neb. He lives in "arguably the toniest apartment" in the Watergate building in Washington: a 4,000-plus-square-foot penthouse for sale for $1.6 million.
Mr. Steadman has many critics. He is "the laughingstock of the fund industry. . . . I've not met anyone who says he owns a Steadman fund," Mr. Lipper said.