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Chuck Jaffe Archives | Email alerts
Dec. 25, 2011, 12:01 p.m. EST
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” No one mourns the loss of a mutual fund, but investors should not ignore for whom the bell tolls.
Counting all share classes, the mutual fund industry killed off about 1,300 of its laggards, stragglers and strugglers this year, its lowest total in years. These dire and departed funds are a motley mix of the uninspired, and goofy, the marketing failures and big mistakes that should have cashed in their chips long before they actually snuffed it.
Still, a few of these issues created legacies or lessons that investors should remember. With that in mind "” and in the spirit of year-end retrospectives about famous people who died in the past 12 months "” it's time to tell some tales from the fund crypt.
Among the funds that passed in 2011:
Dblaine
This is a small fund scandal you've probably never heard of. The Dblaine Fund opened in December 2009, run by David Weilliver and his small investment firm in Buffalo, Minn. To grow the fund quickly, Welliver in December 2010 bought the Bryce Funds, folding them into his flagship and raising assets by about 2,400%, to $9 million from $350,000.
According to the Minneapolis Star-Tribune, Welliver's financed the purchase with $4 million in high-interest loans from a firm called Lazy Deuce, which specializes in "non-traditional funding for a variety of businesses and purposes." In exchange for the loans, Welliver agreed to put some of the fund's assets into private placements recommended by Lazy Deuce.
According to the U.S. Securities & Exchange Commission's October complaint against Welliver and his firm, that "improper quid pro quo" was concealed from shareholders, who might otherwise have recognized that the manager "” who hadn't even properly researched the private investments "” had put his own interests ahead of theirs.
Further, the SEC alleges that fund valued the private placement at the purchase price, even after the manager knew it was losing value and then became worthless, meaning the fund offered, sold and redeemed shares at inflated share prices.
While investors suffered, the SEC says Welliver "enriched himself by spending at least $500,000 [of the loans] for his personal benefit, including spending the money on a new car, vacations, meals, home improvements, high-end department store purchases, jewelry, his son's college tuition, and the payment of back taxes."
Dblaine was liquidated in July, with just $54,000 in assets left for its 80 shareholders. Just this week, Welliver sued his chief compliance officer, basically suggesting that his former employee failed to warn him about the potential violations he was committing. Nice.
Direxion Airline Shares
Honestly, you have to think this ETF was created for the cool ticker symbol (FLYX), because the investment concept was horrific, focusing on one of the most volatile and troubled industries in the world. No one wanted to fly with this fund, and performance was never better than a crash; this fund lasted 11 months and three days from take-off to touchdown, but it felt like a crash with a loss in that time of more than 35%
FIMCO Select
This fund suffered a serious identity crisis. Run by a small firm called Frontier Investment Management, it really couldn't use "Frontier" in its name because there already was a fund with that name, and it was well on its way to becoming one of the worst funds of all time. [ That fund finally died in 2010; read about it here.]
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Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund... Expand
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors," was published in the spring of 2010 by John Wiley & Sons. Collapse
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