For now, let’s forget about what you can’t control. Sometimes investing success comes from what you avoid rather than what you actually buy.
With that in mind, I recommend you take a pass on the following five mutual funds:
Bill Gross’ Total Return
One of the greatest bond investors of all time, the co-founder of Pimco and manager of its $251 billion Pimco Total Return Fund (PTTAX) has been in the press an awful lot lately. It seems he’ll say almost anything in an effort to persuade his investors to stay put despite the near-unanimous belief bonds and bond funds are going to be slaughtered as interest rates rise.
Can you blame him?
He built his reputation on being the bond guru. If bonds are irrelevant, he’s irrelevant — that’s not the legacy you want to leave. Nonetheless, his comments sound desperate, as Paul Lamonica of CNN Fortune rightly points out.
The reality is, anyone who wants some portion of their portfolio in bonds is better off with a passive index mutual fund or ETF. As Lou Mannheim said to Bud Fox in the movie Wall Street, “Kid, you’re on a roll. Enjoy it while it lasts, ’cause it never does.”
The ‘Stupid Name’ Fund
There are some really poorly named mutual funds; none worse than the Pimco All Asset All Authority Fund (PAUIX).
I hate to pick on Pimco, but it sounds like something right out of the Pentagon. They might as well call it the Pimco “Go Anywhere Buy Anything Fund” because that’s exactly what it is. Portfolio Manager Rob Arnott’s investment strategy is to invest in whatever Pimco funds he deems appropriate to maximize investors’ real return while preserving capital at the same time.
It all sounds very nice. But have a look at the fund’s holdings and you’ll see it owns 46 different Pimco funds. Why not 56? Why not every mutual fund offered by the company? The whole point of investing in mutual funds is to simplify your life. This fund doesn’t do that by any stretch of the imagination.
Performance-wise, it has performed decently, achieving a 5-year annualized total return of 6.3% — only 235 basis points worse than the S&P 500. In addition, its trailing twelve-month yield is a robust 7.1%. It’s not the worst fund in the world, but I doubt it’s worth attracting $32.2 billion in total assets. The average person should definitely stay away.
Oppenheimer Commodities
The Wall Street Journal discussed the twin concepts of contango and backwardation in July. While informative in nature, I can’t help wondering how many people actually got through the entire article.
As far as I’m concerned, if you’re worrying about either one of these words and you’re not a commodities trader, you need to get out more often. Forget you ever heard these terms.
In recent months I’ve written some articles using statistics cobbled together by the website NerdWallet. In May, the site highlighted the 12 worst mutual funds to own, based on a sampling of 13,000. At the very top of the list was the Oppenheimer Commodity Strategy Total Return Fund (QRAAX). NerdWallet went with the “C” class while I’m going with its “A” class. Whatever the class, you should avoid at all costs; there are simply better alternatives.
For instance, I’m a huge fan of the ING Corporate Leaders Trust Series B (LEXCX), which is up 18% year-to-date through Sept. 11. Although it’s trailing the S&P 500 by 152 basis points in 2013, it has beaten the index on an annualized basis in the 3-year, 5-year and 10-year periods. Why do I mention this? Because approximately 40% of assets are invested in commodities-related stocks. You get significant exposure to commodities — with performance to boot.
Full-Bull Latin America
What do you get when you combine a declining stock market with a leveraged bull fund? Really crappy performance. The Direxion Monthly Latin America Bull 2x Fund (DXZLX) seeks monthly investment results that are 200% of the calendar month performance of the S&P Latin America Index.
The index itself is 40 of the most highly liquid companies in South America. The problem — Brazil represents 53% of the portfolio. Year-to-date through Sept. 11, Brazil’s stock market is down 14.4% — the worst performance of any major country. Now amplify that by 200% and you’ve got a hot mess. Investors are paying 1.9% annually for the privilege of losing money.
Since its inception in May 2006, the fund has achieved a negative annualized total return of 12%. Year-to-date it’s down 25%. Sure, you can make the argument that its luck’s about to change … but why take the risk? I don’t believe in leveraged funds to begin with, so going into Brazil where things are upside down right now is simply asking for trouble.
Bill Gross AGAIN
I started with Bill Gross and I’m ending with him, too. Part of his latest diatribe includes recommending longer-term Treasury Inflation-Protected Securities as a hedge against accelerating inflation.
While some analysts speculate that rising interest rates will lead to higher inflation, it’s not exactly a new topic. Arthur Laffer wrote an op-ed in the Wall Street Journal two years ago entitled “Get Ready for Inflation and Higher Interest Rates.” We saw the rising interest rates, but inflation is still very subdued. I don’t doubt that inflation will creep back into our lives … but not in the immediate future.
Therefore, I’d avoid DWS Global Inflation (TIPAX), a one-star-rated fund that is down 11% year-to-date through September 11. In the long-term, I could see a reason for including it in your portfolio, but not before taking advantage of at least another 6-12 months of rising equity markets. When inflation becomes obvious, then it will be time to act.
Until then, you’re going with a “prevent defense” — something that almost never works.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
