Dreyfus Greater China
The casual 401(k) investor might think that amid global economic slowdown, China remains the one red-hot market. After all, China GDP is running at about a 9% annual pace — significantly higher than America and Europe — and Western companies from McDonald’s (NYSE:MCD) to General Motors (NYSE:GM) are all betting big on the boom of China’s emerging middle class.
So how come the Dreyfus Greater China Fund (MUTF:DPCAX) is off more than 30% in the past year? And why is it that other emerging-market funds with a China emphasis also have flopped so badly?
To use the Wall Street phrase, it’s because of fears about a “hard landing” in China. There are worries about what will happen to the export giant if its currency continues to strengthen, and if America continues to talk tough about trade. There are hints of a housing bubble in China, with reports of high-rise ghost towns with no residential tenants in the condos and no businesses in the office space. Then there’s the concern about any data we are given from the communist state, since China is notoriously opaque.
The bottom line is that it is extremely difficult to transition from a hyper-growth emerging market to a slower-growth developed economy, and there are countless examples of this. Many fear China will be hitting its wall soon after years of rapid expansion — and if the end doesn’t come in 2012, it will come in the next few years for sure.
That makes Dreyfus Greater China and all other China-focused funds a very risky bet for your retirement. The growth was good while it was there, but the decline in China could be a 401(k)-killer.
Vanguard Diversified Equity
Vanguard Diversified Equity (MUTF:VDEQX) has a great name. You’d think that by buying into this fund you are getting a well-balanced portfolio meant to mitigate your risk. Unfortunately, it’s diversified in the worst way possible.
This Vanguard investment is a so-called “fund of funds.” That means its holdings are other mutual funds — eight of them, to be precise. Why is that bad? Well, because you are paying fees twice — once to Vanguard for Diversified Equity, which then pays fees to the other funds within its stable.
On top of that, the diversification is not achieved through calculation but by a “too many cooks in the kitchen” approach. As of this writing, Pfizer (NYSE:PFE) or Apple (NASDAQ:AAPL) pop up in most of the eight component funds’ list of top holdings. Why the heck do you need that many mutual funds to comprise VDEQX if they’re going to own the same stocks?
Even more damning is that the collective fund managers aren’t exactly the cream of Vanguard’s crop. InvestorPlace.com mutual fund expert Dan Wiener writes that “Diversified Equity’s eight-fund portfolio has almost 20 management teams, and none of them is on the short list of funds to build your portfolio from.”
No wonder Vanguard Diversified Equity has underperformed the market significantly in both short- and long-term returns.
In general, “funds of funds” are pretty suspect investments. But Vanguard Diversified Equity is a prime example of the problems presented by this kind of fund and how it could kill your 401(k).