Chuck JaffeTop stock fund is still a bad bet
7/10/12 7:12 PM ET (MarketWatch)
This update corrects the spelling of Malcolm R. Fobes's name. Also, it clarifies the value of a $10,000 investment made in 1997 and held through 2006.
BOSTON (MarketWatch) -- In the mutual fund business, performance forgives all sins. But when investors overlook flaws that would be deal-breakers if not for good recent results, they're headed for trouble.
Consider
Stupid Investment of the Week showcases concerns and characteristics that make a security less than ideal for average investors, in the hope that spotlighting trouble in one situation will make it easier to avoid elsewhere.
The one tradition for this column -- which is not intended as an automatic sell signal -- is that a fund leading its peer group as the year reaches its midpoint always earns a booby prize for its fast first-half results. The basic premise is that hot funds with fabulous but volatile short-term performance regress to the mean, so investors who buy after the hot streak only experience the next downturn.
Yet the calendar itself does not dictate the sustainability of an investment track record; sometimes momentum can be sustained long enough so that a shareholder who jumps after a hot fund could come away happy.
That said, if you wanted to bet on which funds would be unable to sustain momentum, it's the ones with characteristics that typically send a fund to the dog house. Even all-time losers such as the now-defunct Steadman Funds, American Heritage Fund or Frontier Micro-cap Fund -- which generated massive losses for anyone fool enough to stick with them -- topped the charts for three- or six months.
History lesson
That's what makes Berkshire Focus so intriguing. Just a few years ago, the fund had all of the earmarks of an all-time stinker.
No longer. In fact, the recent track record suggests something completely different. But that still doesn't mean that someone should chase performance.
To see why, let's dig into the history of Berkshire Focus.
The fund has always had an identity problem. The public often confuses it with Berkshire Hathaway, the company run by legendary investor Warren Buffett. Moreover, the fund's manager is Malcolm R. Fobes III, which gets people thinking he is part of the Forbes family, famous for its investing prowess.
Wrong on both counts.
In fairness, no one from the fund and none of its paperwork has ever suggested that the fund invests in the fashion of Buffett or the late Malcolm Forbes, founder of Forbes magazine.
In fact, the fund is the polar opposite, as witnessed by portfolio turnover of nearly 800%. The fund is tightly focused on a few stocks and trades like crazy around its core holdings.
The strategy has worked, sometimes. The fund first gained a reputation with triple-digit gains in both 1998 and 1999, a move so strong it even drew money manager and CNBC star Jim Cramer as an investor.
Then the Internet bubble burst, and so did Berkshire Focus's performance. By 2006, the fund's return since the market peak was an annualized loss of 25%, one of the worst among all funds over that time despite a 67% gain in 2003.
A 2% expense ratio -- about double what most people pay for a stock fund -- plus the transaction costs that come with all that turnover mean that the fund always faces an uphill performance battle. As recently as three years ago, the fund still had a miserable long-term track record.
Today it doesn't.
Over the last five years, according to Morningstar, the fund is in the top 1% of all tech funds, the category Morningstar places it in due to huge chunks of
The fund is still in the bottom 20% of its category over the last 15 years, but that shows just how much it has overcome in the past decade, where it stands just outside the top 10%; it now carries a four-star rating from Morningstar. The fund is also is a "Lipper Leader" for total return, ranking atop Lipper's multi-cap growth category in virtually every time period for the past decade.
A $10,000 investment in the fund at the end of June 2006 was worth $20,000 at the end of June 2012, according to Morningstar. That's in sharp contrast to a $10,000 investment when the fund started in 1997 that by 2006 had dwindled in value to about $4,150. Still, if that same investor had held on through the worst, he would have had about $15,500 at the end of May 2012, Morningstar reports.
An investor looking at recent results should not ignore the long-term record. Beyond the fund's feast-or-famine results, consider that Fobes opened Berkshire Technology Fund after the great late 1990s run, but closed it during the bear market -- before it could post its second consecutive year with losses north of 70% -- having turned a $10,000 investment into $800.
Fund experts say recent performance should not forgive the past. Steve Goldberg of Tweddell Goldberg Investing knocks Berkshire Focus as being "insanely overpriced" and having "ridiculously high turnover and strange industry concentration."
Indeed, investors can get similar exposure to technology through a traditional tech-sector fund -- even better, in fact, because it wouldn't invest in food joints and other distractions -- and with less risk, cost and volatility.
"There's danger in looking at the five-year numbers, the Morningstar ratings and the short-term results without looking under the hood of a fund," said Matthew King, chief investment officer at Bell Investment Advisors in Oakland, Calif.
"Any fund can have a good quarter or six months or even a few good years, but what matters is the chance of those good results being repeated," he added. "If you see high costs and conditions that can cause trouble, you don't want to be fooled by what the fund has done lately."
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