Investors holding mutual funds in 2008 that dropped 30 percent or more may think the funds were among the worst funds anyone has ever owned. Think again. There is one fund that many agree qualifies as the worst ever (not counting outright frauds like Bernie Madoff’s) – the Steadman Technology & Growth Fund.
The Steadman family of funds started in 1939, but it recently came to my attention through a June article in ValueWalk.com. According to the article, ever since Charles Steadman assumed personal management of the funds in the early 1960s, they were always at the bottom of the performance charts.
The Los Angeles Times reported that the Technology & Growth Fund, in particular, lost nearly 90 percent of its value by the time Steadman died in 1998 – a period that saw the rise of personal computing and the early internet. At that point, the four remaining funds were consolidated into a single fund. It continued to limp along until ultimately being liquidated in 2011.
Reasons for failure
How did the fund and its siblings manage such poor performance during a period when the Standard & Poor’s 500 index increased by nearly 1,500 percent?
First, the management team/investment strategy was poor. Steadman appeared to focus primarily on acquiring the latest hot stocks, which invariably results in buying high and selling low. The frequent transactions generated high commission costs and taxes on capital gains. In addition, Steadman’s constant trading never gave his investments the opportunity to compound over time.
Second, investors were charged high costs. As performance declined, investors bailed and the asset base of the funds dwindled. Yet Steadman and his team did not reduce expenses; rather, they continued to pass them on to investors as part of the funds’ operating costs.
Lawsuits against the fund were difficult because legal fees were passed on to investors – a move the Los Angeles Times labeled “in effect holding investors hostage.”
By 1998, the annual cost per share amounted to an astonishing 14 percent. The fund elected trustees to unlimited terms, eliminated annual meetings and delayed annual reporting. The fund managers didn’t appear to put much of their own skin in the game. The Times reported that Steadman himself invested only approximately $16,000 of his own money.
Why would anyone consider investing in funds operated in such a manner and with such poor performance? The answer is they didn’t. From 1988 to 1998, the fund did not acquire any new investors. A large number of investors actually died while holding the fund.
A word to the wise
There is a lesson in all of this. If you are going to invest in a mutual fund, you should at the very least do the following.
• Take the responsibility to understand the fund’s investment strategy. This information is now required to be reported in a concise, readable four-page summary prospectus. If you don’t understand it or don’t agree with it, then don’t invest.
• Do not pay too much for the fund. Cost information is also in the Summary Prospectus. Lipper Research reports that the average mutual fund costs approximately 1 percent annually. If yours costs more, there should be a good reason.
• Track performance, at least annually. If it’s below expectations, that’s not necessarily an indication that the fund should be sold, but rather that it should be investigated further.
• Ensure that annual meetings are being held. Read proxies. Check to see that trustees are doing their jobs.
It’s easy to judge a fund simply based on its historical performance. But the Securities and Exchange Commission-mandated warning – past performance is no guarantee of future returns – is absolutely correct. Proper due diligence is important not just when selecting new funds, but also for those you are currently holding as well.
Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, call 209-4062 or email [email protected].
