Published December 23. 2012 4:00AM
It's time to spread a little holiday jeer, with the second helping of my annual Lump of Coal Awards.
Now in their 17th year, the Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-industry fumblers for action, attitude, behavior, execution or performance that is misguided, bumbling, offensive, disingenuous, reprehensible or just plain stupid.
Last week, I noted six situations where the recipients deserved nothing more than an inky chunk of carbon in their Christmas stocking. Today, it's the rest of the "winners."
The final 2012 Lumps of Coal go to:
• The U.S. Securities & Exchange Commission, for needing two extra years to figure out whether a fund's board was negligent when managers were charged with fraud.
Just last week, the SEC announced charges against eight former directors of the RMK funds for "violating their asset-pricing responsibilities" when funds they oversaw were crushed during the financial crisis of 2007-08
RMK High Income and RMK Intermediate Bond, both run by James Kelsoe, the Lump of Coal Mis-Manager of the Year in 2007, held illiquid securities that were improperly valued when daily share prices were calculated. Basically, the fund board allowed Kelsoe to set the market prices on some sub-prime paper that there was little or no market for. In many cases, as the sub-prime market was imploding, the securities were still valued at their purchase price.
The minute real valuations were put in place for the underlying securities, the funds cratered. In 2010, the SEC and other regulators charged the RMK funds' managers with fraud, accepting $200 million last year to settle the charges.
The directors, of course, deserve our scorn, but they weren't charged with anything until this month.
It shouldn't take that long to recognize board ineptitude and wrongdoing. Read the first cases and it is obvious that the managers were aided and abetted by the board's policies (or lack thereof) and actions (or lack thereof).
To send a statement that fraud falls not just on the evil-doers but on their handlers and overseers, the SEC needed to hit RMK's directors at the same time it was smacking down the managers, making it easier to tack on serious fines to the settlement and making the rest of the industry's boards stand up and take notice that they will be held complicit if a manager misbehaves on their watch. Instead, the filings made last week went nearly unnoticed.
• Morningstar Inc., in the hope that coal will make the firm get meaner.
Just over a year ago, Morningstar began giving analyst ratings to funds, basically breaking the fund world into three categories, "the ones we like or love," which get ratings from gold to bronze; "the ones we don't care about," which get a "neutral" rating, and "the ones we dislike/hate," which draw a "negative" review.
The problem is the firm's analysts like nearly two-thirds of the funds they review, while just 5 percent of the rated funds get negative marks.
That's less fund watchdog, and more fund lap dog.
Morningstar howls at that criticism, however, with officials noting that it has rated roughly 1,050 funds and that the process is complete, meaning that about 6,100 funds (using just one share class per fund) will go unrated. Those unrated issues are funds where the firm doesn't believe it is worth the time and effort of its analysts, tiny issues that just aren't drawing much money and that will only be worth rating if their record and asset growth attract mainstream attention.
That's a de facto analysis and when you throw those issues into the mix, Morningstar officials note that medalists account for 9.5 percent of the entire fund universe, thus showing investors a small, focused target group.
It's a good point, but it doesn't change the problem.
Presumably, the average investor is ignoring the same funds that Morningstar chooses not to rate, and for the same reasons. They don't need Morningstar's help for that (proven by the fact that so many of those funds are small and not worth the firm's analytical time). If investors gravitate naturally to funds worthy of analytical attention, giving two-thirds of those funds a medal weakens the value of the ratings; there needs to be more bite behind the firm's bark.
• Advisor Shares, for missing the obvious problem when it opened the Global Echo ETF (GIVE).
It's hard not to like this new ETF's mission of pursuing environmental sustainability, or even quarrel with an above-average expense ratio when you know that 0.4 percent of the cost structure goes to support the Global Echo Foundation, a charity created by Philippe Cousteau Jr., grandson of famed French explorer Jacques Cousteau. Never mind that several other ETFs that have promised to support causes failed to gather assets or support; the real problem here is that Philippe Cousteau is known less for his efforts as a social entrepreneur than for his famous granddad, the undersea explorer.
Apparently no one saw a problem creating a fund that would put "ETF" and "underwater" into one thought; when investors have a sinking feeling, it's impossible to raise a new issue from the depths of the tiny, amusing fund creatures.
• The SEC, again, for its failed attempts at money-market fund reform, 12b-1 fee reform, and the establishment of a fiduciary standard for financial advisers.
The SEC had a lot of important, worthwhile initiatives on its agenda this year, and while it could be argued that it was too aggressive in its stalled quest to change the money-fund business, there's no arguing that the agency accomplished virtually nothing on those key challenges.
In fact, it pretty much looks like the agency has given up, and with SEC Chairman Mary Schapiro moving on, all of these initiatives will lose ground before they have a possibility of picking up steam under new leadership. In short, the agency has a lot of good ideas; the problem is that it can't get them past the idea stage.
• Harry Dent, the current "sage of doom and gloom," for failing to spot the trend.
The personable, charismatic Dent is known mostly for his forecasting, which is good because he hasn't shown any skill as a fund manager, finally pulling the plug on his AdvisorShares Dent Tactical ETF this summer, after about three years where calling performance "mediocre" is being way too kind.
The question is why anyone with foresight didn't expect things to turn out this way.
Dent is a popular talking head/pundit, but his forecast history is spotty. He used demographic trends in the late 1980s to say that Japan was about to enter a prolonged downturn (Bingo!) and that the Dow Jones Industrial Average would hit 10,000 in the late 1990s (Bullseye!), but his book "The Roaring 2000s" predicted Dow 35,000 (Bzzzzt, wrong answer!) and "The Next Great Bubble Boom" said 2006-2010 would be the greatest boom in market history (I think not.).
His first mutual fund, AIM Dent Demographic Trends, opened in mid-1999 and was killed off, mercifully, in 2005, with a loss that was double the size of its average peer over that tough market stretch.
The new ETF, effectively, was the same strategy in a new wrapper; with a gross expense ratio north of 1.5 percent, its only hope was that Dent's predictions would be spot-on for a protracted period of time. Really now, did anyone see that happening?
Sure, a stopped clock is right twice a day, but one that runs fast or slow could go years without being on time. Anyone who had seen Dent's past performance as a fund manager should have foreseen that AdvisorShares Dent Tactical would take a licking, then stop ticking.
• The USX China Fund, for the year's worst performance.
If you want to know why some investors are nervous about China, look at USX China (HPCCX), a tiny fund that personifies "what's the worst that could happen?" It's down more than 65% this year, the only operating issue in the entire mutual fund realm to have dropped more than 50 percent. Worse yet, according to Morningstar, the average China Region fund is up about 15% year-to-date. A new manager, who took charge in February, has not helped.
If the fund had significant assets (instead of just about $1 million total), and if it hadn't been down by even more in 2011, when it shed 73 percent at a time when its average peer was losing about one-third that much - USX China would be the Lump of Coal Mis-Manager of the Year.
• The team at Westcore Select, the Lump of Coal Mis-Managers of the Year.
In every asset class and category, someone has to finish last, but there's a difference between simply lagging peers and shocking shareholders, and investors in Westcore Select (WTSLX) must be stunned this year. It's not just that the $185 million fund with its concentrated portfolio - something rare in the mid-cap growth space - is dead last in its peer group, according to both Morningstar and Lipper, or even that the fund is in negative territory.
The problem here is that no other fund in the category has lost ground this year, according to Lipper, while Westcore Select is down nearly 14 percent. In fact, the average fund in the group this year is up about 12 percent; if not for a sister Westcore fund that is barely in positive territory, Westcore Select would lag its closest peer by 18 percentage points. That will put a damper on your holiday spirits.
Chuck Jaffe, senior columnist for MarketWatch, can be reached at email@example.com or at Box 70, Cohasset, MA 02025-0070.