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Dec. 8, 2015, 8:52 a.m. EST

These dumb mutual fund moves failed investors in 2015

Presenting the 20th annual Lump of Coal Awards for the fund industry

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By Chuck Jaffe, MarketWatch


Bloomberg

Time flies when you are having fun, and nothing has been more fun over the last 20 years than giving out my annual Lump of Coal Awards.

Started in 1996 as an open letter to Santa Claus, the Lumps of Coal have grown into a two-part holiday tradition of singling out the bad boys and girls of the fund industry who deserve nothing more than a lousy lump of lignite in their Christmas stockings each year.

Lousy performance alone is not enough to justify these carbon-based trophies. The Lump of Coal Awards recognize managers, executives, firms, watchdogs and other fund-industry fumblers for actions, attitudes, behaviors, execution or results that are misguided, bumbling, offensive, disingenuous, reprehensible or just plain clueless.

And the losers are:

Sequoia Fund, for acting like the Steadman Funds:

Sequoia /zigman2/quotes/209100218/realtime SEQUX +0.66%   is legendary in the fund business for being a pillar of all things right. Started by Warren Buffett’s one-time stockbroker, the fund was closed to new investors for decades and was on everyone’s wish list. Analysts at investment researcher Morningstar Inc. jokingly put other funds’ actions to the “Sequoia-Steadman” test, to decide if a fund was acting more like the best fund in history (Sequoia) or the worst funds ever (the now long-defunct Steadman funds).

This year, Sequoia itself is the bad actor.

It’s not just that the fund moved to where it wound up with over 30% of its portfolio in one stock, Valeant Pharmaceuticals International   or that Valeant was roundly assailed for jacking up prices to increase profit margins. When Valeant was accused of faking sales through a “phantom pharmacy,” the stock cratered and Sequoia investors lost 6% in a single October day.

When the fund moved to increase its Valeant stake, some directors apparently balked. Two independent directors left; they have not talked with the media.

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And while Sequoia has said plenty to investors about Valeant — its notes read like missives from the company’s public-relations firm — it said nothing about the directors. Their names were simply removed from a list deep in the fund’s documents.

In the end, Sequoia may cash in and get the last laugh about Valeant, but right now — with the fund down more than 8% so far this year and standing dead last in Morningstar’s large-growth category, and with its 10-year record now below-average — it feels as if Sequoia has lost the management and research edge that once made it great.

Eaton Vance Tax-Managed Global Small Cap Fund, for adding insult to injury:

While no one likes a loss, the nearly 5% decline suffered by this Eaton Vance /zigman2/quotes/208450708/composite EV -0.73% mutual fund /zigman2/quotes/208776568/realtime ESVAX +0.22%  thus far in 2015 should have made it easy for management to live up to the tax-efficiency portion of their mandate. Instead, the fund is kicking off a 30% distribution, one of the 20-largest payouts announced this year, according to CapGainsValet.com; it’s the only tax-managed fund to have confirmed a payout of more than 20%.

The oversized distribution results from recasting the fund from domestic small-cap value to global; Eaton Vance notes that taking the big hit caused by major portfolio changes all at once is better than dragging it out and possibly impairing future performance and tax efficiency. That won’t make investors feel better when they write a fat check to Uncle Sam.

The Geoff Bobroff Memorial Lump of Coal goes to the Adaptive Allocation Fund, for disconnecting its prospectus from its website — and reality:

Geoff Bobroff was my sounding board and a key behind-the-scenes contributor to the Lumps of Coal until his death of a heart attack in 2014. An industry consultant and former chairman of the Matthews Asia Funds, he’s the only person I’ve ever known who liked digging through fund arcana looking for laughs more than me. As such, I now give an award each year in his honor for something that emanates from the paperwork.

/zigman2/quotes/209100218/realtime
US : U.S.: Nasdaq
$ 169.59
+1.11 +0.66%
Volume: 0.00
Aug. 4, 2020
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/zigman2/quotes/208450708/composite
US : U.S.: NYSE
$ 36.68
-0.27 -0.73%
Volume: 312,851
Aug. 4, 2020 4:00p
P/E Ratio
10.74
Dividend Yield
4.09%
Market Cap
$4.23 billion
Rev. per Employee
$939,759
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/zigman2/quotes/208776568/realtime
US : U.S.: Nasdaq
$ 13.81
+0.03 +0.22%
Volume: 0.00
Aug. 4, 2020
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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...

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.

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