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June 27, 2003, 8:20 p.m. EDT

Perennial loser wins Q2 crown

Tiny, costly Apex fund spikes after atrocious decade

By Jonathan Burton,

One of six stories in our quarterly funds wrap-up. See also: Stock Funds Rally ; Bond Fund Winners ; Bear Funds Mauled .

SAN FRANCISCO (CBS.MW) - As Suresh Bhirud discovered, even habitual losers can sometimes win.

His Apex Mid-Cap Growth is up 78 percent in this second quarter through June 26, making it the top-performing mutual fund tracked by financial-research firm Lipper.

Ordinarily, almost doubling investors' money would be a crowning achievement. But Apex Mid-Cap Growth is no ordinary fund.

"No one in their right mind should own this fund," said Morningstar analyst Brian Portnoy. "This fund is arguably one of the very worst funds in the history of mutual funds."

Bhirud runs what is little more than a publicly sold personal portfolio, with assets of just $400,000. The fund's 8 percent annual expense is roughly seven times costlier than the typical small-cap growth offering. And that skimming off the top comes in addition to a 5.75 percent front-end sales charge.

For a full decade now, Bhirud has lost his investors a staggering sum. In the last 10 years, while the S&P 500 Index gained an average of 10 percent a year, Apex Mid-Cap Growth has lost 13 percent a year. Its dismal average masks crushing one-year blows, such as a 76 percent decline in 2000 and a 42 percent tumble in 2002, according to investment research firm Morningstar.

Even counting this second quarter's result, $10,000 invested in Apex upon its November 1992 launch would have whittled to about $2,600 today. The fund sits at the very bottom of the small-cap growth category for both five- and 10-year performance.

Nothing to crow about

For most consumer businesses, such as airlines or automobiles, going from worst to first in performance is an honor. Not so with mutual funds. Such a huge jump in ranking suggests that a manager was just lucky enough to be in the right place at the right time.

In the last quarter, the right place to be was in speculative small-cap stocks, and Apex was there. Bhirud got a huge boost from investing half of his fund in momentum-driven technology and Internet companies. Top gainers included former high-flyers such as Netflix (NAS:NFLX) , Tivo and Pacific Internet - all coming off low prices that created stunning percentage gains in the past three months.

"All the factors, from luck to skill - everything came together," Bhirud says. "A lot of the stocks I just kept and hung onto them for dear life."

Bhirud could say much the same about how he's kept his fund going. The soft-spoken 54-year-old picks stocks from a Stamford, Conn. office where he runs investment screens on a universe of 3,000 companies. The fund holds about 60 stocks.

The former Wall Street investment strategist says he wanted Apex to deliver "great performance" over time. But even at the height of the bull market in 1999, the fund's 42 percent return that year still lagged its peers by 17 percentage points and assets never climbed much above $2 million.

Then the bear market rumbled through and Bhirud rode some stocks like Pacific Internet all the way down. He sold winners to meet shareholder redemptions and assets bled away. He considered closing the fund last year, but decided to give it one more shot.

And what a shot it's been this quarter. Still, Portnoy suggests that keeping this fund alive was a mistake.

"Unfortunately these are the kind of funds that show up on trailing three-month lists when we've seen intense rallies like this," Portnoy says. "I'd hate to think that an unwitting investor would see such a great return as indicative of what their experience is going to be."

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