After years of expecting a little something extra around the holidays, most people in the mutual-fund world are getting nothing extra for Christmas this year. That said, it's my job to fill some of those holiday stockings. It's the annual Lump of Coal Awards, my holiday tradition of finger-pointing at the bad boys and girls of the fund business, the ones who should get nothing more than an inky chunk of carbon from Santa this year.
The Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-world types for action, attitude, behavior or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.
With the average equity fund down by more than 40%, it would be easy to carpet-bomb the entire industry with insults this year, but the losing actually has made it harder to pick "winners" -- the buffoons and miscreants who added insult to injury by blunder, ignorance or arrogance.
The 2008 Lump of Coal Awards go to:
1. Bruce Bent, co-founder of the first money-market fund and chairman of the Reserve Funds.
Category: Forgetting that talk is cheap
For years, Bent railed against money funds holding anything riskier than Treasury bills and bank certificates of deposit. He ridiculed competitors for buying commercial paper, short-term corporate debt that's routinely unsecured.
But in 2006, when Reserve's money funds were lagging the field in yield, Bent's firm started buying the same things he once described as "garbage." Reserve's money-fund yields climbed the charts.
Meanwhile, Bent continued ranting well into 2008 about the horrible investment behavior of others, ignoring the fact that his funds had become the most dangerous of the bunch.
Holding $785 million in Lehman Brothers paper, Reserve's Primary fund was forced in mid-September to "break the buck," after that debt was officially declared as garbage in light of Lehman's financial troubles.
2. The Investment Company Institute
Category: Doing too little, too late
The money fund crisis came into full bloom in mid-September. The ICI -- the fund industry's trade association -- established its money fund working group in November, long after the focus of the economic crisis had moved on to other parts of the financial world.
3. DWS Investments
Category: Forgetting why investors gave them money in the first place
When DWS decided to close its miserable small-cap value fund, logic dictated that it move the assets into DWS Dreman Small Cap Value Fund, a sister fund in the same asset category and with a similar investment style.
But DWS Dreman Small Cap Value (KDSAX) was -- and remains -- closed to new investors, so DWS instead folded the fund into DWS Dreman Mid Cap Value Fund (MIDVX) .
As a result, investors wound up in an asset class they didn't pick, missing out on David Dreman's top-rated small-cap issue and getting his below-average mid-cap fund, thereby enduring a much larger loss on the year.
4. Every 2010 target-date fund
Category: Missing the bulls-eye
At the very time that investors most needed life-cycle and target-date investing to work, it failed.
Target-date funds are all-in-one portfolios built to age with an investor, so that the closer they get to the target date, the more conservative they become. As such, 2010 funds -- built for investors less than two years from hitting retirement age -- should be a comparatively safe haven.
Instead, the average 2010 fund is down nearly 30% this year. See related story on target-date funds' losses.
5. Oppenheimer's target-date funds
Category: The year's most off-target performance
Oppenheimer is dead last in its peer group for funds targeted for 2010, 2015, 2020 and 2030. By comparison, Oppenheimer 2025 is a star, standing next-to-last in its category. And Oppenheimer 2040 and 2050 didn't launch until March, but since their inception date, both rank dead last in their peer groups too. With performance like that, Oppenheimer may not be running "life-cycle funds," so much as "death spiral funds."
(Second place in this category goes to AllianceBernstein. Were it not for Oppenheimer's misery, Alliance Bernstein would be dead last in every target-date category tracked by Lipper Inc..)
6. Fritz Reynolds of Reynolds Blue Chip Growth Fund
Category: Faking his way to the top
Reynolds runs the top-performing "multi-cap core" fund in the Lipper database, and the top large-growth fund tracked by Morningstar Inc. The average competitor is down about 41.5% this year, but Reynolds Blue Chip Fund (RBCGX) has lost just 5%. You'd think that would earn him kudos and not coal, but Reynolds topped those stock-picking categories by being mostly in cash; for much of the year, he's been 0% in blue-chips and 100% in cash.
Worse yet, with a 2% expense ratio, when Reynolds goes all to cash in current market conditions, he's virtually dooming shareholders to a loss. If Reynolds was so convinced it was time to hit the sidelines, he should have told shareholders to sell his fund, park the cash in an account paying a bit of interest, and then asked them to re-up when he thinks it's time to buy again.
7. Dreyfus Emerging Markets
Category: Opening the doors and punching new visitors in the face
Dreyfus Emerging Markets Fund (DRFMX) re-opened to new investors the first week of December. Even in a troubled economy, solid funds re-opening to new money attract a lot of interest, mostly from people who had previously been kept out.
But the Dreyfus fund reopened less than two weeks before it is scheduled to pay out a 38% capital gain. In short, anyone who bought in when the fund re-opened will get kicked in the teeth with a big fat tax bill on the money they invested.
8. Regions Morgan Keegan
Category: Not knowing when to quit
Two former high-fliers, RMK's Select Intermediate Bond Fund (MKIBX) and Select High Income Fund (MKHIX) , may have been the industry's biggest travesties over the last two years.
Manager James Kelsoe -- the Lump of Coal (Mis)Manager of the Year in 2007 -- had a huge slug of money in subprime paper, so that both bond funds lost more than 50% last year, then watched things go from bad to worse in 2008.
High Income is down nearly 80% and Intermediate Bond has lost 85% this year. For every $1,000 invested in the funds at the start of 2007, there's less than $100 left now. You'd be hard-pressed to find two funds more deserving of liquidation,
Regions Morgan Keegan finally got rid of Kelsoe, but inexplicably kept the funds open, with a new subadviser running the money.
9. Ron Fielding of the Oppenheimer Rochester Municipal funds
Category: Sticking to your guns when they're aimed at your own feet
The Rochester funds have traditionally flown high on the muni-bond performance charts, largely because of Fielding's penchant for diving headlong into the riskiest portions of the bond market - notably sectors like tobacco, housing and airlines - to capture extra yield. As a result, Fielding's funds - and he's ultimately responsible for 18 Oppenheimer-owned issues - took on a lot more credit risk than the competition.
Results have been a horror show. Most of the Rochester single-state funds are down more than 35% this year, and Oppenheimer Rochester National Muni Fund (ORNAX) is down 48% this year, which is far more abysmal than the average stock fund in 2008.
Fielding has remained bullish, but a combination of redemptions and the continued credit crunch is likely to make things worse before they get better, which in turn could cripple the entire Oppenheimer family. Oppenheimer's target-date funds are suffering because of their bond exposure through Fielding's National Muni portfolio.
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