Fundline: What was the worst fund news to hit in 2008?
— -- 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.
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