There's a guy in California's San Fernando Valley who's making it a personal mission to help investors ferret out and avoid poor mutual funds. He's Roy Weitz and his website is www.fundalarm.com.
Weitz takes many mutual funds and the companies that run them to task, classifying poor performers as "3-ALARM" funds, which he lists for our perusal. For example, some of the top 50 "most alarming 3-ALARM funds" (based on data as of March 31, 2004) include Boyle Marathon (FUND:BFUNX), PBHG Growth (FUND:PBHGX), and ProFundsUltraShort OTC (FUND:USPIX).
Weitz also recently drew attention to something rather critical to mutual fund investing: fees. You're probably familiar with expense ratios, which reflect a fund's annual expenses. But the truth is, the expense ratio doesn't include all of a fund's operating costs. Trading commissions, for example, are excluded, and if your fund does a lot of buying and selling, as many funds do, well, there are real costs that pile up quickly, eating away at your gains.
Weitz cited a March 17 Wall Street Journal article on hidden costs in funds and went on to list some of the bigger offenders. In first place was Van Eck International Investors Gold A (FUND:INIVX). Its reported expense ratio was 1.97%, but its "commission expense ratio" was a whopping 3.85%, giving it a combined expense ratio of 5.82%. Runner-up was the ING Small Cap Opportunity Fund A (FUND:NSPAX), with a reported ratio of 1.89%, a commission ratio of 2.24%, and a combined ratio of 4.13%.
The Van Eck fund has had some recent years with big gains, as well as some years with major losses, so its performance hasn't been too reliable for investors. The ING fund, invested in stocks such as Chico's FAS (NYSE:CHS) and Cognizant Technology Solutions (NASDAQ:CTSH), has lost money in three of the last four years. Both funds sport 5.75% front-end loads, meaning they take nearly 6% off your initial investment as soon as you invest. Then, thanks to their combined expense ratio, they go on to take another sizable bite each year. Ouch.
If you're planning to invest in a fund, try to find out its commission expense ratio, if you can. Most funds don't disclose it, but some fund families such as Putnam do, or plan to do so soon.
In the meantime, learn as much as you can about funds in our Mutual Fund Center and on our Mutual Funds discussion board. And if you're interested in receiving recommendations of funds to consider buying rather than reading about funds to consider selling, check out our new newsletter, Motley Fool Champion Funds.
Longtime Fool contributor Selena Maranjian does not own shares of any companies or funds mentioned in this article.
