It's been a terrible year for the stock market but a banner 12 months for misbehavior, misguided thinking, and outrageous maneuvering in the fund business. That's why there's plenty of material for the 2008 Lump of Coal Awards, presented to the mutual fund industry's bad little children, the ones who deserve nothing more than a bituminous bauble in their Christmas stocking this year.
Last week, this column dropped coal on some of 2008's miscreants. Now it's time for the rest. Bad results alone are not enough to earn the prize here: Lump of Coal Awards recognize managers, executives, firms, watchdogs and others for action, attitude, behavior or performance that is bumbling, offensive, disingenuous, reprehensible or just plain stupid.
And the losers are:
Ardent supporters of exchange-traded funds
The year's most irrational exuberance
With ordinary funds suffering, many people touted the benefits of exchange-traded funds as an inherently better way to go, as if the ETF structure automatically made a pooled investment good. ETF assets ballooned as a result of this kind of thinking, peaking in mid-September, just in time for the market's big decline.
Don't get me wrong, I love the ETF structure. But ETFs are not immune to the problems plaguing traditional funds, particularly when it comes to performance. For proof, consider this: Since the first ETF was launched in 1989, according to Morningstar, the ETF industry collectively has produced a net loss for investors. In other words, lump all ETF investors together and, on the whole, the only ones to profit from the evolution of the exchange-traded fund would be the firms creating the ETFs in the first place.
Worst actor among big fund companies
Investors in actively managed funds want their managers to outperform the benchmark when the going is good and to lose less than the average in the peer group when the market is in the tank. That's particularly true at Fidelity, which has always prided itself on its stock-picking, hinting that it has an edge in any "stockpicker's market" and having a good track record through downturns to prove it.
In 2008, however, Fidelity stuck too long with a global growth strategy, and shareholders got slaughtered. Two-thirds of Fidelity's 180 actively-managed domestic equity funds currently rank below their average category peer for the year; more than half of Fido's international funds are in the same boat. Fido has 42 different managers working on growth and growth-and-income funds, and 37 are lagging the S&P 500 this year.
Self-immolation and unflattering imitation
Putnam appears to be trying to create a new future by changing its past. It's not just the poor publicity the firm has received since the Internet bubble popped in 2000, it's that Putnam apparently decided that the way it was running money was so bad that it needed a total overhaul. The firm's core principle had been team management, and now - since giving the reins to former Fidelity honcho Robert Reynolds - it's all about individual managers. That's kind of like switching your coin-flip bet from heads to tails; both approaches are equally promising . . . and risky.
By blowing up its old ways, Putnam admitted its methods weren't working and gave a Lump of Coal to itself (a first). Putnam investors might feel good about the changes, except that Reynolds is recreating the firm in Fidelity's image and, as already noted, that's bad news this year.
The Securities and Exchange Commission
Fiddling while the fund industry burned
The SEC promised significant fund reforms for 2008, but didn't accomplish anything. Its best move was permitting the new summary prospectus, but that improves the document without actually getting anyone to read it. The regulatory agency talked tough about eliminating 12b-1 fees but never came close, the proposed independent chairman rule is dead, and investors who are mistrustful of the fund business won't find anything on the SEC docket that will make them feel better about the future.
Couple that with regulatory bungling on any number of high-profile, big-name cases plaguing Wall Street and its hard not to believe that the agency has forgotten how to protect the small investor.
Bill Miller of Legg Mason Value Trust
The Lump of Coal (Mis)Manager of the Year
For the 15 years ending in 2005, Miller's primary fund, the Legg Mason Value Trust, outperformed the Standard & Poor's 500. During that time, it appears Miller was busy reading his press clippings and letting them go to his head; he seems to have mostly been thinking about how big a payoff he could get by being right, without ever assessing what would happen if his judgment was wrong. The streak misled investors into thinking this was an all-weather staple, all while Miller's strategy was becoming extreme to the point of being inappropriate for many of the mainstream investors who stuck with him.
That came to a head in 2008, when Legg Mason Value Trust is off about 55 percent, dramatically worse than its average peer.
Miller's current streak - three straight years of abysmal results - has turned his once-sparkling long-term record into mush. Legg Mason Value Trust now ranks dead last of the 300 large-cap blend funds that have been around for the last 10 years, according to Morningstar.
Further proving his ineptitude when the market is working against his value style, Miller managed Legg Mason Opportunity (LMOPX) to an even worse year. Once upon a time, Opportunity was pitched as the best way to access Miller's smarts in a small, nimble investment vehicle (albeit one that carries much higher expenses). Instead, it has been the worst way to access Miller, ranking in the bottom 1 percentile of its mid-cap peer group for the last one, three and five years. Its 65 percent loss this year should prove to Value Trust shareholders that, yes, things really could be worse.