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Updated Saturday, December 15, 2012 at 10:01 PM

Chuck Jaffe: Lump of Coal Awards, Part I

By Chuck Jaffe
Syndicated columnist

Your Funds

In the best of years — and 2012 will go down as a pretty good one in terms of the mutual-fund industry — most investors are willing to overlook misbehavior and overt bumbling so long as it doesn’t directly show up in their account statement.

They shouldn’t be so nice to the naughty.

With that in mind, it’s the 17th annual Lump of Coal Awards, my two-week holiday tradition of easing Santa’s burden by singling out the bad boys and girls of the fund industry who deserve nothing more than a lousy lump of lignite in their Christmas stockings this year.

Bad results alone do not ensure a booby prize.

The Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-industry fumblers for action, attitude, behavior, execution or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.

And the losers are:

Grant Park Managed Futures, for suggesting that investors pay no attention to the man behind the curtain.

Managed-futures funds are a fast-growing category in the fund world, and many of the three-dozen funds now in the space invest with commodity trading advisers, or firms that manage underlying pools of commodities.

Those firms typically charge expenses like a hedge fund, meaning 2 percent for management, plus 20 percent of performance.

Put these investments into a mutual fund, and there’s another layer of costs; worse yet, due to some arcane fund and tax rules, the SEC never required these funds to disclose their underlying hedge-fund-like costs.

As an ongoing dispute rages between the fund and commodities industry associations, a number of fund sponsors have been disclosing all of their fees, expecting that ultimately to be the new standard.

Enter Grant Park, which has stopped disclosing any reference to its underlying management and performance fees.

That lack of disclosure “cut” the fund’s expense ratio from 3.55 percent in its Jan. 2012 annual report to 1.97 percent in its Sept. 2012 prospectus. Instead of being transparent and showing investors the inside costs, Grant Park went all the way to invisible, with no mention of the underlying costs whatsoever.

The costs are still there, of course, but if you can’t see what’s behind the curtain, you can’t tell that the great and powerful wizard is really a snake-oil salesman. Worse yet, Knollwood Investment Advisors — which runs the fund — told Morningstar that its next annual report would use the conventions of the prospectus when reporting costs; the logic, apparently, is that fees from the underlying asset pools are “transaction costs,” which funds do not disclose or include as part of expense ratios.

Hogwash, but allowable, at least for now; expect other funds in the space to follow suit, just to compete.

I don’t think we’re in Kansas anymore.

•The Patriot Fund, for using both patriotism and terrorism as marketing tools.

Started early this year, the Patriot Fund erroneously claims to be “introducing terror-free investing” to the fund world, avoiding investments in companies doing business with nations identified by the U.S. State Department as sponsors of terrorism. (Abacus Bull Moose Growth fund (BULLX) became Roosevelt Anti-Terror Multi-Cap in 2007, before eventually dropping terror from its name.)

While the Patriot Fund’s rhetoric includes mentions of North Korea, the official list covers just Iran, Syria, Sudan and Cuba.

Strip away the rhetoric and you’ve got a strategy of buying domestic companies that honor the United States’ embargoes against those nations; that covers more than 90 percent of the market cap of the Standard & Poor’s 500.

It’s hardly like most domestic funds are somehow “terror-filled,” which is the insinuation made by the terror-free label.

Thus, the play here is all about emotion, turning both patriotism and terrorism into cheap promotional gimmicks; even if Patriot turns out to be a decent performer, that’s nothing to be proud of.

Morningstar, for giving less disclosure than it wants from others.

The Chicago-based research giant is a moving force in the fund world, and regularly pushes others for more and better disclosure, trying to make sure investors — and its researchers — have every available bit of relevant information.

And yet, in early August, a “Fund Times” piece prepared by six of the firm’s analysts, noted that FocusShares “plans to close and liquidate its entire lineup of 15 exchange-traded funds, all of which have minimal asset levels ... [citing] current market conditions, the funds’ inability to draw assets and their future viability, as well as prospects for growth in the ETFs’ assets, for the closing.”

What Morningstar failed to mention there is that all 15 of the ETFs were based on its indexes; most people — and the firm’s own database — referred to them as the Focus Morningstar funds.

The Presidential Protected Profile funds, for poor performance in an election year.

Lincoln Financial unveiled the Presidential funds just before the start of 2012, and in the race that is fund investing, they lost to virtually every other candidate for your money by a landslide.

Presidential Protected Portfolio 2020 is among the bottom five funds in its peer group year-to-date, according to Lipper. Its 2030, 2040 and 2050 sisters are dead last in their respective peer groups. Only the 2010 fund managed to avoid the absolute cellar; it, too, was a laggard.

Talk about putting shareholders on the edge of a fiscal cliff ...

Permanent Portfolio Short-Term Treasury, because a bond fund shouldn’t make shareholders envious of money-market returns.

A short-term U.S. Treasury fund doesn’t have to win big, but it shouldn’t lose money when rates aren’t volatile ... for four years in a row. Permanent Portfolio Short-Term Treasury (PRTBX) has lost 2 percent over the last five years, making it the worst performer in its peer group, according to Lipper. The second-worst performer is up over 7 percent over the same span.

Suggesting that investors use a money-market fund instead is akin to ask them to settle for nothing, but considering that this fund is worse-than-nothing ...

Next week: regulators, watchdogs, the Lump of Coal (Mis) Manager of the Year and more.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at or at P.O. Box 70, Cohasset, MA 02025-0070.

Copyright, 2012, MarketWatch


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