We have been so busy over the past couple of weeks with beat up investors from all over the world. A common thread that has linked many of these investors together is their penchant for “hot” mutual funds.
We define these funds as long on marketing and short on track record. Many Americans bought into the hype of these funds with their short existence and great marketing campaigns.
James D. McCall was one of Wall Street’s best stock pickers in the late 1990’s, his hand so hot that Merrill Lynch, eager to revive sales of its mutual funds, paid a ransom to his previous employer to win his services. Starting early last year, Merrill’s brokers proceeded to collect more than $1.5 billion from their clients for Mr. McCall to invest.
But in a breathtaking reversal of fortune, Mr. McCall has compiled one of the worst investment records of the new century with that money. All but about $650 million has been lost, leaving shares that cost many Merrill customers more than $10 each worth slightly more than $2.
Mr. McCall’s main fund, Merrill Lynch Focus Twenty, held the rare distinction of ranking in the bottom 1 percent among funds of its kind for the previous day, week, month, quarter and year, according to Morningstar Inc., a company that analyzes mutual funds.
Though Mr. McCall is free to invest anywhere in the stock market, he has stuck to a growth-seeking strategy that kept the fund invested primarily in technology stocks throughout that sector’s long, steep decline. Down almost 80 percent in the last year, the fund’s performance has been significantly worse than that of the average technology fund.
Mr. McCall’s rapid rise and fall demonstrates how fleeting stock- picking stardom can be. Too often, investors raced after the past returns of the fund manager of the moment, only to find out they were pursuing a fraud who only knew how to handle an up market. Fund managers should have been placing investors funds into fundamentally sound companies. Instead they decided that Wall Street was their own personal Las Vegas and cared not for the risks only the returns and their next appearance on CNBC.
In roughly five weeks, Merrill’s brokers gathered a total of more than $2 billion for Focus Twenty and the Internet Strategies fund. Almost immediately, those funds collapsed along with the Internet and technology stocks they owned. Internet Strategies, which Mr. McCall does not manage, never recovered and has now lost more than 90 percent of its value.
Navigating through the treacherous waters known as the “Sea of Funds” is a rough task. If you have any questions regarding any of the funds you may own or what their prospects are feel free to contact us.