News Column

Kiplinger's Mutual Hall of Shame

March 17, 2003

Steven T. Goldberg

The competition was fierce, but we found the real losers for our HALL OF SHAME.

Reaching Edward Carroll, the acting manager of Gintel fund, isn't easy these days. When we tried, the fund's toll-free line -- the lifeblood of any mutual fund -- was out. That didn't really matter, though, because Gintel fund can't accept new shareholders until November, under terms of a one-year moratorium imposed by the Securities and Exchange Commission, which also suspended founder Robert Gintel for six months. The SEC says that, among other things, Gintel broke his fund's own conflict-of-interest rules by buying and selling stocks for his personal account within seven days of trading the same stocks for the fund. Stand-in Carroll calls the present state of affairs "a real mess -- it's difficult enough to run a portfolio."

Welcome, Gintel, to the Mutual Fund Hall of Shame.

We built this gruesome edifice in 1990 as a home for the spectacular failures of the mutual fund world. Bad results alone aren't enough to put a fund into our hall. Something extra is required -- the equivalent of repeatedly beating your head against a brick wall, maybe. Such as failing to show a proven bad manager the door. Or larding rotten returns with an especially high expense ratio. Run-ins with the SEC help. So does hubris. Bragging about how smart you are while losing your clients' dough is sure to grab the attention of the Hall of Shame's induction committee, made up of the righteous, sober, pitiless editors of this magazine.

But why belabor these points? Let's get to our new inductees. By the way, we are not unforgiving people. We're happy to remove a fund if it demonstrates it no longer deserves a niche in our special place.

ETHICS PROBLEMS

Managing money is something that neither Gintel nor Carroll appears to do well. Gintel, 75, has run Gintel fund since its inception in 1981. Carroll, 63, has been with the firm 20 years, the past six as co-manager. Results stink because of poor stock selection and failed market timing; the fund has suffered double-digit percentage losses in four of the past five years. Bear in mind that this is a fund that specializes in beaten-down stocks of midsize companies -- a category that has shown signs of life the past few years. Over the past three and five years, Gintel fund has lost an annualized 22 percent and 7 percent respectively -- bad enough to earn it last place among its peers during both periods. It has the worst returns among its peers over the past ten years, too.

The SEC settlement adds insult to injury. Although Gintel did not admit wrongdoing, he paid a $75,000 fine and disgorged $489,239 in profits from trades that violated the conflict-of-interest rule. He also had to pay $169,620 in interest. What's remarkable is that the fund still has $63 million in assets, although Carroll says about 40 percent of that belongs to Robert Gintel and his family members. Expenses are 2 percent annually -- no bargain at all. Our efforts to contact Gintel were fruitless. But shareholders will hear from him because he's coming back.

MINNESOTA CHUTZPAH

Robert Markman practically embodies the word chutzpah. The 51-year-old Minneapolis fund entrepreneur published a book in early 2000, Hazardous to Your Wealth: Extraordinary Popular Delusions and the Madness of Mutual Fund Experts, in which he argued that diversification among different types of stocks -- an article of faith among investment experts -- only dilutes investment profits. Instead, Markman said, stocks of large, fast-growing companies, primarily the tech giants (which were riding high at the time), should dominate your portfolio. But almost immediately after the book was published, Markman's recommended brand of stocks went into a nose dive that has been far worse in the three years since than the losses suffered by any other type of stock. Investors in Markman's four funds lost their shirts. (Full disclosure: We spoke well of the book ourselves.)

Even now, Markman won't concede that the essential points of his book are flawed, like so much else born of the technology bubble. "Clearly, the timing of the book was inopportune," he says. "But a lot of the book still applies." He now says, however, that stocks of large, undervalued companies can also make good investments.

Markman launched his four "funds of funds" -- that is, funds that invest in other funds -- in 1995. He claimed his expertise would more than make up for the 0.95 percent annual expenses the funds imposed above and beyond the expenses of the funds he purchased. As it turned out, 1999 was the last year that Markman's two most aggressive funds managed to do better than Standard & Poor's 500-stock index. Over its last five years, the Markman Aggressive Allocation fund trailed the S&P 500 by an annualized nine percentage points, and Markman Moderate Allocation fund trailed the index by an annualized seven percentage points. That made Markman, who had bet he'd beat the index, the loser of a much-publicized wager with the Vanguard Group's founder and indexing advocate, John Bogle.

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