Stay away from these mutual funds in 2006


Before you come "in with the new," you have to go "out with the old."

About 1,200 old mutual funds went out in 2005, merged or liquidated out of existence. That's an increase of about 20 percent from both 2003 and 2004. Many more funds shifted gears, changing names and investment styles to swap an old image for a new one.

Some dead funds leave behind haunting tales from the crypt, a legacy of lessons for all investors. So, in the spirit of year-end retrospectives that list the famous people who met their demise in the past 12 months, here's a review of the most noteworthy funds to pass on in 2005.

The Henlopen Fund

Despite a great long-term record, manager Michael Hershey wanted out, so he sold Henlopen's management contract to the Hennessy funds. Both Hershey and Neil Hennessy said the two firms had a "comparable investment style."

But Henlopen was run with an active, bottoms-up growth approach, while Hennessy - which turned Henlopen into Hennessy Cornerstone Growth Fund, Series II (ticker HENLX) - uses a passive, quantitative, top-down approach.

The lesson: If management tells you that salt and pepper taste the same, get nervous.

The Strong funds

Once a picture of good performance by independent, midsize managers, the entire Strong family was wiped out in 2005, merging into the Wells Fargo funds. Strong was sold after having been disgraced during the mutual fund rapid-trading scandals; company founder Richard Strong was personally involved, and the firm rotted from the head down.

Thurlow Growth

This fund is your basic undead zombie. It started life hot as a firecracker, gaining more than 200 percent in 1999. From inception in 1998 through early March 2000 - when the market peaked - this was the best-performing fund in the world.

On its Web site, however, the fund made time stand still, hyping that peak gain long after the bear market mauled it. The Securities and Exchange Commission was not amused, especially when the fund finished dead last in its peer group in 2000. It repeated that lowly feat in 2004, with well-below-average years in between.

Early last year, Thurlow announced plans to close. Lipper Inc. shows that the fund was liquidated in late April, but Morningstar still has it among the living. Thurlow again has time standing still, mentioning the closing on its Web site but with no details; the most recent daily price on Thurlow's automated phone line is from early August 2004. If the fund is alive - and the transfer agents who stopped reporting data to Lipper say that it is, but not for long - it appears that management checked out long ago.

Thurlow will forever be proof that a fund that can't do the little things right will have problems with the big things.

Runkel Value

In late June, Business Week crowed about small funds, especially those named for the manager. Among the "yet undiscovered gems of fund-dom" was Runkel Value, described as "still small enough to be agile."

By the end of October, the fund was dead, perishing undiscovered despite years of good performance, and proving again that the fund business is not a meritocracy. (If it were, thousands of mediocre funds would have perished before Runkel did.)

AIM Dent Demographic Trends

Based on forecaster Harry Dent's prediction that aging baby boomers will drive the Dow to 40,000 during the next decade, this fund underperformed its large-growth peer group so consistently that shareholders gave up on its premise.

So did AIM, which in July merged the fund into Aim Weingarten, clearly hoping that investors would forget the whole gimmicky thing.

State Street Research Investors Trust

The nation's second-oldest mutual fund, State Street Research Investors Trust celebrated its 80th birthday in 2004. In those 80 years, the fund's average annual gain was more than 12 percent; a $10,000 investment in 1924 was worth more than $115 million at the start of 2005.

In January, however, when BlackRock completed its acquisition of State Street, the fund was merged to death. Alas, the forgotten legacy of this fund is that it provided exactly what investors want: consistently above-average, long-term returns without flash and dash. It's good to know that's possible, and sad to know that a shining specimen is gone.

Frontier Equity

One of the worst funds in history, Frontier Equity is the living dead, a horror show illustrating what can go wrong. New management took over a few years back and still hasn't managed to bring the expense ratio down into single digits.

But instead of murdering the fund, management kept the track record but changed the investment focus.

The result is that the old Frontier is officially dead, but the new Frontier Micro-Cap (ticker FEFPX) is dead on arrival.

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset MA 02025-0070.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad