The big enchilada of each issue of Motley Fool Champion Funds -- the Fool newsletter designed to beat the market while putting the fun back into fund investing -- is our Fund of the Month feature. Picks that earn this distinction come outfitted with reasonable expense ratios, talented and successful managers, and sensible long-term strategies -- qualities, in other words, that make 'em worthy candidates for your portfolio.
Not for nothing are these cherry-picked keepers the newsletter's official recommendations. So far, in fact, all but three of our equity funds have made money for shareholders since I first recommended them, and taken together, our Champs are beating the market by nearly 6.5 percentage points.
Not too shabby, eh?
Dudsville
Championship-caliber mutual funds, of course, are relatively few and far between. The money-management business is notorious for its overpriced underachievers, funds that charge you a premium for the "privilege" of losing out to the broader market and to comparable peers and benchmarks. It's for that reason we, um, lowlight one Dud of the Month every issue. These are funds that you shouldn't touch with a proverbial 10-foot pole -- and that if you do own, you ought to consider selling.
Some funds practically scream their Dudhood, with sky-high price tags, untested managers, and consistently anemic returns. Others, however, can be tougher to spot than you might imagine, and Morgan Stanley Natural Resource Development Securities (NREBX) is a textbook example of this particular variety of Dud.
On the surface, after all, this sector fund doesn't look like a candidate for selling: it's returned nearly 38% for the year.
Unhappy endings
But that's, alas, where this fund's happy story ends. More than a third of the assets here are parked in B shares, which are generally a great deal for brokers and a terrible one for investors. B shares don't carry a front load, but you will pay a "deferred load" if you redeem them prior to their conversion to A shares. And along the way, you'll also pony up a sky-high price tag. In the case of this fund, the deferred load will ding you up to 5%, and thanks in part to a fat and unhappy 12b-1 fee of 1% (which helps pay the person who sold you the fund), the expense ratio here is 1.9%. In other words: yikes. And let's not even discuss the fact that the fund's manager has only been on the case since February.
Two other broad points are worth making: First, though there are exceptions, I'm generally skeptical of sector funds. They're inherently volatile -- a point that goes double for energy prices. Beyond that, you can always up your industry exposure through a diversified fund whose manager tilts toward -- rather than falls headlong into -- a given sector.
Consider that the bulk of this energy fund's top holdings -- including Chevron
So while any decision to sell has to be made in light of the tax hit you'll take, I think Morgan Stanley Natural Resource is a good candidate for the see-ya-later pile if you currently hold it.
Lessons learned
But beyond just pointing out specific funds to avoid, the newsletter's Dud of the Month feature has an educational purpose, too. Even if you don't own the funds we zero in on, you can use them to gauge those that you do. To aid that cause, in recent issues, we've begun "bullet-pointing" the lessons learned from the Dud column.
Recent lessons include: "With B shares, B is for broker" and "Avoid load funds. I've yet to encounter one so strong that an even better no-load replacement couldn't be found."
The upshot, then, is this: Champion Funds has you covered coming and going. If you'd like a sneak peak at the Fool newsletter that not only recommends funds you should own but also tells you which kinds of funds to avoid, simply click here for a risk-free 30-day trial. There's no obligation to subscribe.
You and your nest egg will be glad that you did.
This article was originally published on Aug. 2, 2005. It has been updated.
Shannon Zimmerman is the lead analyst for Champion Funds. He doesn't own any of the securities mentioned above. The Fool has a strict disclosure policy, and you can read all about it by clicking righthere.
