The Worst Fund Ever Finally Dies

Garrison Keillor once quipped, "A good newspaper is never nearly good enough, but a lousy newspaper is a joy forever." Examining the history of a terrible mutual fund can be just as entertaining -- until you consider all the very real money its investors have lost. In this case, at least, there's a bright side: What some have called the worst mutual fund ever is shutting down, never to lose another dime. (We hope.)

Frontier Microcap (FEFPX) has lost an average of 37% each year over the past decade. If you had plunked $1,000 into this fund 10 years ago, you'd have roughly $11 left today.

Fees count
Amazingly, more than half of your losses as a shareholder in this fund would have come from fees, not poor management. Last time I checked, Frontier Microcap's expense ratio topped 18%, in addition to a 4.5% sales load. When even forking over 2% or 3% can seriously depress your results, paying 18% a year can be a recipe for disaster. Add a 4.5% bite every time you purchase new shares, and that disaster becomes an outright catastrophe.

How could any fund have such a ridiculously high fee? In this case, size matters. Good funds usually grow their assets under management, enabling them to spread their fixed costs -- salaries and other overhead -- over a bigger asset base. In theory, as a fund grows ever bigger, its fees should fall as a percentage of assets. Curiously enough, that often doesn't happen, perhaps because the managers grow fond of keeping a bigger slice of the pie for themselves.

Frontier Microcap always had a small pool of assets, meaning its managers had to charge more to cover their expenses. Once a measly $1.6 million, Frontier Microcap's asset base is down to just $53,000 now. Even an 18% cut of that leaves the managers less than $10,000.

Lessons galore
Let Frontier Microcap be an excellent reminder to keep an eye on your holdings. You don't want to find out that one of your funds has lost 30% of your money over each of the past few years. Fees deserve close monitoring, too. You want to see 1% or less for managed funds, and that cost ideally should fall as the fund grows. Consider any expense ratio of 2% or more a red flag worth investigating.

It's not hard to find great fund returns, even at low expense ratios. I've rounded up a few examples:

Data: Morningstar.com.

Do you have a worst mutual fund or worst stock investment to tell us about? Please leave a comment below and tell us all about it!