Published December 22. 2013 4:00AM Updated December 23. 2013 11:57AM
Investors overlook a lot of mistakes mutual funds make, so long as those errors don't show up in their account statement.
I'm not so generous.
It's the 18th annual Lump of Coal Awards, my two-part holiday tradition of easing Santa's burden by singling out the bad boys and girls of the fund industry who deserve a lousy lump of lignite in their Christmas stockings this year.
If these booby prizes were based entirely on performance, there would be little to write about in 2013, with the stock market up about 30 percent year-to-date.
There's no hiding behind good or lucky performance here, however. The Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-industry fumblers for action, attitude, behavior, execution or results that are misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid. With the rising market hiding performance flubs, the emphasis this year falls on conduct that is inept, butterfingered and graceless.
And the losers are:
Wells Fargo, for a pricing mistake it hoped no one would notice.
Fund prices are supposed to reflect the value of underlying securities, but there are plenty of times when issues are mispriced, typically by fractions of a penny. When it happens, errors are corrected, affected investors are made whole and it's business as usual.
But Wells Fargo had to reset the net asset value for two international funds in September, and the stakes weren't penny fragments; Wells Fargo Advantage International Value shares fell by more than 5 percent and Wells Fargo Advantage Diversified International shares by more than 2 percent the day the fix was made.
Wells Fargo said nothing; oh, it disclosed the pricing changes in a "product alert," and set things right, but it never said what went wrong. That's insulting to shareholders' intelligence, which is why investors should wonder what else could go wrong that management wouldn't feel the need to tell them about.
Management at the Royce Funds, for a self-serving idea disguised as a good move for shareholders.
Royce Value Trust (RVT), a closed-end fund with a good track record, invited shareholders to a special stockholders' meeting in September where it asked them to "contribute a portion of the Value Trust's assets to a newly-organized, closed-end management company, Royce Global Value Trust."
The requested $100 million "contribution" - 8 percent of RVT's assets - was not a donation, of course; investors were simply being asked to move a chunk of their money from a domestic fund into one that only buys foreign stocks and can put one-third of its assets into emerging markets.
This wasn't about diversification, however. Royce needed $100 mil to kick start Global Value (RGT), keeping expenses low and meeting the listing qualifications for the New York Stock Exchange. In other words, the true beneficiary of this move was the fund adviser.
Investors in Royce Value Trust, for approving the deal.
We know that no one reads the paperwork they get from funds, but shareholders must stop saying yes to nonsensical arrangements that they don't understand. If you can't figure out how something helps you, don't approve it.
The Tealeaf fund, the worst-named new fund of the year.
It's too early to tell whether Tealeaf Long/Short Deep Value (LEFAX) will overcome a high expense ratio and mature into a good fund, but it's too late to take the nascent issue seriously based on its name.
Sure, they could have picked imagery that's worse than tasseography, the art of reading tea leaves to divine the future - Tarot, Scrying (crystal ball gazing) or Chiromancy (palm reading) all are available - but anyone who blows it when they name the firm doesn't inspire confidence in what happens next.
Morningstar, for forgetting that the mettle of a fund is what earns its medals.
Morningstar introduced analysts ratings in 2011, going beyond its traditional star system to have analysts come out and say which funds are truly worth owning, based on the Olympic winners scale of gold, silver and bronze.
There's no denying that the analyst ratings are a significant upgrade and help to investors - a kind of "Good Housekeeping Seal of Approval" - but anyone who watched Olympic contests before the fall of the Soviet Union knows that there are winners who show their stuff in competition, and then "winners" decided by the outrageousness of the judges.
There are plenty of questionable medalists in Morningstar's ratings, but none more than Royce Low-Priced Stock (RYPLX). There's no denying the fund's problems - Morningstar's own data shows that the fund has consistently delivered below-average returns with above-average risks, excessive costs and a bloated pool of assets - but the comrades judging the fund competition still gave the fund a silver medal.
For investors to truly trust the analyst ratings, they have to see that winners are deserving, instead of coming away feeling like the results are rigged.
The folks behind Equinox Commodity Strategy fund, for apparently misreading both the market and the solar calendar.
In the year leading up to the opening of this fund in 2011, the average commodity fund was up nearly 30 percent.
Thus, the fund came late to the party in its asset class, and while it managed not to do as poorly as the average fund in the group - an annualized loss of roughly 5.4 percent compared to a 6.25 percent decline during its short lifespan - management pulled the plug this summer. Then they scheduled the final liquidation for Sept. 27, five days late for the autumnal equinox, the event the fund was named for.
Deutsche Bank, for where they put Germany on the map.
When db X-trackers MSCI Canada Hedged Equity couldn't gather more than $5 million in assets, Deutsche didn't simply pull the plug, it overhauled the ETF into db X-trackers MSCI Germany Hedged Equity (DBGR), either on the assumption that investors in the Canada fund meant to invest in a different country on a different continent, or that they wouldn't notice the difference.
YieldShares High Income ETF, for its oily beginnings.
Another case of a new fund created over the corpse of an existing one, investors in the Sustainable North American Oil Sands ETF learned in June that their fund had become YieldShares High Income (YYY). Maybe the managers got oiled up and came up with this at a drunken game of word association (host: "sustainable North American oil sands;" respondent, slurring: "ummm … high income"), but a change this big should have brought a sober reflection that investors deserved a fresh start, rather than having their money hijacked into a completely different strategy.