Often the means of achieving the best returns is not a result of skills in picking the best securities, but in knowing which ones to avoid.
Therefore, reviewing the worst mutual funds of Q1 2015 can provide insight into prevailing investor sentiment and can give us some useful clues about which investment themes may continue for the coming quarters.
To do this, I will separate the worst into three categories:
- The Worst Alternative Funds: These are mutual funds that tend to be the biggest losers (and the biggest winners) because they often use leverage or shorting techniques to bet on short-term market direction.
- The Worst Sector Equity Funds: The worst-performing sectors are often reflective of an overall trend that is strong enough to provide caution (or contrarian buying opportunities) for coming quarters.
- The Worst Bond Funds: The bond market can be a kind of leading indicator for stocks, and knowing the worst-performing bond funds can be powerful information for investors.
With that, I give you the worst mutual funds of Q1 2015:
Worst Mutual Funds of Q1 (Alternative): KKM Armor Fund (RMRAX)
YTD Performance: -30%
KKM Armor (MUTF:RMRAX) takes the prize for the worst-performing mutual fund of Q1 2015.
While there were a few spikes in volatility during the quarter, especially in January, Q1 as a whole was not volatile for stocks and betting on volatility turned out to be a bad idea.
But such is the nature of funds like KKM Armor Fund, which is a long volatility portfolio that seeks to highly correlate with the CBOE Volatility Index, affectionately known as “the VIX.”
In fact, while KKM Armor might be the worst fund for low volatility, it is among the best funds for high volatility.
Other alternative mutual funds losing big in the first quarter were those that bet against areas of market strength, such as the U.S. dollar. For example, Rydex Weakening Dollar 2x (MUTF:RYWDX), which seeks to match double the inverse of the performance of the U.S. Dollar Index — so as the greenback went up this year, RYWDX was trampled.
Worst Mutual Funds of Q1 (Sector Equity): US Global Investors Global Resources (PSPFX)
YTD Performance: -12.4%
A rising U.S. dollar, a shaky world economy, and increasing supply of oil has placed tremendous downside pressure on the price of oil, which was a huge Q1 drag on natural resources funds like US Global Investors Global Resources (MUTF:PSPFX).
Adding insult to injury, PSPFX ranks absolute worst (100th percentile rank for performance) in Q1 compared to other natural resources funds. It even had a worse quarter than average commodities funds that invest heavily in oil.
The quarter is ending with more downside pressure on oil prices, and there does not appear to be a turnaround in store for the commodity in the foreseeable future.
Also worth mentioning was the weak Q1 for utilities. The broad sector index, the Utilities SPDR (NYSEARCA:XLU), ranks below 80% of category peers for Q1 returns, falling approximately 7% in the quarter.
Worst Mutual Funds of Q1 (Bonds): Pioneer Emerging Markets Local Currency Debt Fund (LCEMX)
YTD Performance: -5.6%
The worst bond fund category for Q1 was emerging-market debt, and Pioneer Emerging Markets Local Currency Debt Fund (MUTF:LCEMX) takes the prize here.
The Q1 story on bonds is that the strong U.S. dollar and the generally weakening economies of emerging markets combined for a perfect storm of downside pressure on EM debt.
LCEMX normally invests at least 80% of its net assets in debt securities denominated in emerging-market currencies. Its Q1, it’s looking to finish at a loss of more than 5%.
Although the yield for LCEMX is a high 5.56%, the price risk in current economic conditions makes investing in funds like this questionable, at least in the short term.
But Pioneer is not alone in its poor Q1 performance. Other funds that are more widely known — such as Loomis Sayles International Bond (MUTF:LSIAX), which had a Q1 return of -4.4% — had a tough quarter.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
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