In our never-ending hunt for Wall Street crooks we continue to face-off against the mutual fund industry. From deceptive advertising to ridiculous fees and expenses the fund industry is a large component of what is wrong on Wall Street.
Most investors are in the dark when it comes to fees and expenses. All data points to the fact that fees are rising despite performance that is beyond dismal. This past month there was a fourhour session of the House Financial Services Committee chaired by Michael Oxley (R., Ohio). Mr. Oxley stated:
“Are investors getting a fair shake?”
All recent data indicate the answer is no. Fees and expenses are going up. The sick irony is that those rising fees come as stock-fund holders have seen their retirement accounts dwindle month after month. Mr. Oxley has attacked fund giants Fidelity and Vanguard for mystifying investors and potentially harming them with an array of hidden fees. Mr. Oxley ordered up a study by the General Accounting Office, to further look at fund fees. The result was obvious, since 1998 the majority of stock and bond funds had higher expense ratios in 2001 than in 1998. Even worse are the conflicts of interest that have been first highlighted in this newsletter and are now coming to light in the Wall Street Journal. The incongruity that we have highlighted involves how mutual funds invest in initial public offerings. This past month the Wall Street Journal finally reported what we have been saying for years. Mutual funds affiliated with investment banks hold more stocks of companies that are banking clients than they do of companies that are clients of other banks.
This past month, Fidelity Investments’ flagship Magellan fund that was at one time the worlds largest, is now at a 5-½ year low in terms of assets ending 2002 with $56.8 billion. Last year, Magellan posted a loss of 24%. The S&P’s loss was 23%. In 2001 Magellan’s loss was 12% exactly matching the S&P. In 2000, the fund and the index both lost 9%.
Why do investors pay ridiculous management fees and commissions to have a mutual fund mirror an index and consistently lose money?
Did you know that every stock mutual fund managed last year by Fidelity lost money?
All but one. However, the fund that did make money is not available to investors. Only top management at Fidelity is allowed beyond this velvet rope. The New York Post reported that two years ago, Fidelity set up a company called Geode Investors LLC. By the end of 2002 over $229 million of corporate money was applied to this fund. Fidelity declined comment on this fund. However, according to Fidelity’s annual report the fund received income before taxes of $7.98 million.
Another fund group in our crosshairs is Van Wagoner. This firm was the height of unsubstantiated arrogance during the go-go 90’s. According to SEC documents, Van Wagoner is liquidating three of its six funds. The Van Wagoner Post-Venture Fund, Mid Cap Growth, and Technology Fund are now history. All of these funds were completely irresponsible in their investment style, enormous speculative bets on unproven technology and illiquid securities.
FIVE YEAR ANNUALIZED RETURNS
POST VENTURE FUND -18.43%
*FROM MARCH 1, 2001-JANUARY 30, 2002
THE FUND WAS DOWN 93% TECHNOLOGY FUND
-15.32% MID CAP GROWTH -19.67%
The SEC just announced that for the second time in the past two years they are considering an investigation into Van Wagoner’s method of valuing its private holdings. The firm admitted that civil and or administrative actions were being considered by the SEC.
By the way…Just in case your interested you can still invest in the Van Wagoner flagship Emerging Growth Fund, it’s only down an annualized 18.45% over the past five years.