You don't know who has been swimming naked until the tide goes out, Warren Buffett once wrote. Well, the tide went out last year, and many funds and managers were caught — shudder — without their Speedos. The top three sights that would make you go blind at the financial beach last year:
•The Reserve fund. The nation's oldest money market mutual fund collapsed Sept. 16, allowing its share price to fall below $1 — "breaking a buck," as it's known in the industry. It was a staggering blow to the money market industry, which has long held itself out as a bastion of safety.
Bruce Bent, chairman of the Reserve funds, was an outspoken critic of other money funds, often arguing that they took too much risk. "A lot of money funds lost their way," he told USA TODAY in August. "Just follow the rules. Don't get clever."
If only he'd listened to, um, Bruce Bent. The Reserve fund collapsed because it had owned securities issued by Lehman Bros., the large investment bank that had filed for Chapter 11 bankruptcy the day before Reserve broke the buck.
•Ultrashort income funds. You can count on some small, hapless stock fund posting an appalling loss each year.
But you don't expect those kinds of losses from a bond fund, especially one that sold itself as a mildly risky alternative to a money fund.
Unless, of course, it's Schwab YieldPlus, which plunged 35% last year. The fund, like many ultrashort funds, invested in bonds that matured in one year or less. In theory, that means the fund should have relatively small price fluctuations, while sporting yields somewhat higher than money funds. Unfortunately, some of those short-term bonds in the Schwab fund were backed by subprime loans, the market that collapsed completely last year.
Schwab's wasn't the only ultrashort bond fund to suffer last year: The entire category fell 6%, and ultrashort funds offered by Fidelity, Dreyfus, JPMorgan and Legg Mason all produced below-average results. Nevertheless, Schwab's offering was the worst of the lot.
•Legg Mason Prime Value. Manager Bill Miller has been lauded, deservedly, for beating the Standard & Poor's 500-stock index for 14 consecutive years.
All good things come to an end, though, and Miller's streak ended terribly: The fund posted a 58% loss last year, mainly because of his large holdings in financial services stocks, such as Bear Stearns, the now-defunct investment bank, and Freddie Mac, the mortgage giant now under government receivership.
In 2007, fund companies rolled out exchange traded funds at a record pace. Now they're disappearing at a record clip.
ETFs are mutual funds that trade on the stock exchanges, just like shares of IBM or Apple. A complex redemption mechanism makes sure that the funds' current share prices accurately reflect the value of their holdings. Investors love ETFs because they're easy to trade, and because they're easy to sell short — a bet on falling prices. Fund companies love ETFs because they generate management fees.
Because ETFs are usually index funds, however, they don't generate juicy fees — unless the ETFs get really large. Those that don't become large tend to go away.
It's doubtful how much investors will miss some of these funds, which had limited appeal. The HealthShares Ophthalmology ETF, for example, specialized in stocks of companies that combat eye problems. The Bear Stearns Current Yield fund failed because, well, it had "Bear Stearns" in its name.