I've written before about lousy mutual funds, and I hope to do so again. It's just fun, I confess -- but not for those who have invested in the funds.
Here's a new laggard to get to know: The Phoenix Market Neutral (EMNAX) fund, singled out by Forbes magazine recently as a "booby prize" winner. I was delighted to learn of it myself, and headed over to Morningstar.com to look it up. (I correctly assumed it would not be among the many funds recommended by my colleague Shannon Zimmerman in our Motley Fool Champion Funds newsletter. His picks have been beating their benchmarks by some 15 percentage points -- I suspect that would have been hard to do had this fund been in the group. Try the newsletter for free and you can read about every single recommendation.)
Let's start with the fund's returns:
- 2000: 1.8%
- 2001: 6.6%
- 2002: 5.7%
- 2003: (0.1%)
- 2004: 4.4%
- 2005: (0.1%)
- 2006: (5.4%)
- 2007 (through 8/31/07): (3.4%)
Well, I must confess it could be worse. The volatile Jacob Internet (JAMFX) fund, for example, although it doubled in value in 2003 (yowza!), fell 79% in 2000 and 56% in 2001. That fund company should send out a defibrillator with its prospectus.
Sinking into the ashes?
As a "market neutral" fund, Phoenix "seeks to increase the value of your investment (capital appreciation) in bull markets and in bear markets while maintaining minimal exposure to general market risk by always having both long and short positions in equity securities." Well, while it didn't really lose all that much in the years the market tanked, it also didn't gain that much in years when the market soared. As a result, over the past five years, the fund has lost an average of 2.5% each year, which is nearly 15 percentage points behind the S&P 500.
What kinds of securities does such a fund hold? Some of its long positions, including Warnaco
But in an upward-moving market, it's difficult for market-neutral funds to perform well. The fund sports about an equal number of long and short stock positions. Also, despite having hundreds of stocks, the fund carries more than two-thirds of its total value in just its top 10 holdings, making it relatively concentrated (which can be a good thing in the hands of talented managers, and a dangerous thing in the hands of not-so-talented managers.)
The fund's turnover ratio was recently 285%, meaning that it buys and sells securities in great numbers throughout the year -- nearly three times the overall asset value of the fund.
Is there anything redeeming about the fund? Well, sure. Its dividend yield is a little north of 2%, which is respectable. But oops -- here's another red flag: It sports a load of 5.75%. Oh, and its expense ratio (annual fee) is a very steep 2.19%. So if you buy into the front-end-load version of the fund, you'll have to surrender $575 immediately on a $10,000 investment, and then you'll be charged more than $200 per year -- all for ugly performance. Yikes.
You can do better
Avoid funds like this one by looking out for danger signals such as a poor track record, steep fees, and high turnover. You can invest in a simple broad-market index fund, such as one that tracks the S&P 500, and you'll instantly be invested in 500 of America's biggest companies. What's not to like there? Or aim higher by seeking out the minority of funds that beat the market routinely. We'd love to help you find them, via our Motley Fool Champion Funds newsletter, which you can try for free.
Take a little time to learn more about mutual funds -- perhaps you'll find you love them, too. Here's some recommended reading: