Never Eat at a Place Called Mom’s, and Steer Clear of Kooky Funds

One legend of the fund business has Peter Lynch--the man who made Fidelity Magellan famous--finding some of his greatest buys while strolling through the shopping mall with his family.

But he never started a Fidelity Shopping Mall fund.

Perhaps if Lynch had developed and been successful with an idea like that, I might be less skeptical of gimmick funds.

Sexy track records and established management styles take years to develop. To get around that, a new breed of funds has developed using some kind of hook to make names for themselves.

Being unique generates more publicity than funds like the new Motorsports Associated Growth & Income fund or the StockCar Stock fund deserve. Investing in funds like these that are more hype than investment sense is roughly akin to volunteering to be a crash-test dummy. You could come out fine--or lose your head.

Says fund consultant Burton J. Greenwald: “When marketing people design the product and reach to the limits of their imagination, the results aren’t always good for investors.”

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Oh, but these offerings can sound so tempting. Let’s look:

The two motor sports funds are cashing in on the popularity of auto racing, the fastest-growing spectator sport in the country. The idea is to invest in stocks that are thriving thanks to racing.

But with only a few publicly traded racetracks, these funds invest in companies that have almost anything to do with racing--such as companies that simply sponsor race cars.

Another gimmick is the Pauze Tombstone fund, which invests in the death and dying business--a growth industry in this country--although there are fewer than 10 public funeral/cemetery companies. That’s not enough to warrant an industry fund.

Homestead Year 2000, a fund dedicated to firms specializing in fixing the year 2000 computer problem, has a prospectus that raises the question: What happens in three years, assuming these firms do their job?

The fund business is littered with the corpses of older gimmick funds, from a “television” fund several decades ago to the Forum Sports fund (buying stocks of sports companies), which lasted less than a year before folding in mid-1997.

There is a fine-line distinction between gimmicky funds and offerings designed to meet a real need or fill a niche. Sector and industry funds, for example, are tightly focused, and there are funds with a social agenda, using a personal or religious value and belief system to screen stocks. Gimmick funds stand for nothing more than a slick marketing pitch.

Says fund marketing consultant Geoff Bobroff: “If auto racing truly were a distinct industry, you can bet the big fund companies would be doing this. But the larger organizations stay away from [such] funds . . . and so should most investors.”

Although funds with religious affiliations or social funds like the Cruelty Free Value fund have an agenda in picking stocks, they are not necessarily gimmicks, because potential investors will be drawn to the fund based on its principles.

SteinRoe Young Investor smells like a gimmick fund but really isn’t. Upon further scrutiny, you find a rather ordinary large-cap growth fund, but with paperwork that appeals to kids.

And some gimmick funds could evolve into more acceptable offerings someday. Three funds dedicate themselves to Internet stocks, for example, and the Net could become its own industry rather than remaining a subset of the technology sector.

By comparison, the year 2000 problem has spawned some stocks, but most observers believe it will never be more than a tiny part of the tech game--not to mention one with a limited life cycle.

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The motor sports funds do not really focus on auto racing. NASCAR fans may kill me with hate mail on this one, but Procter & Gamble would not lose billions of dollars in revenue if it stopped painting race cars like a box of Tide detergent.

The question remains whether there is anything wrong with pursuing kooky funds. The answer is in the results.

A gimmick isn’t so bad if it makes money, but few have. And some have lost a lot.

One fund, Steadman Oceanographic, was dedicated to the underdeveloped business of mining the ocean floor and building communities there. The fund, eventually renamed Steadman Technology & Growth, lost more than 90% of its value during a 30-year span.

Says A. Michael Lipper of Lipper Analytical Services: “A gimmick doesn’t make it a money-loser, but I would think twice about investing in any fund that has gotten much more publicity than its record would merit. Especially a new fund from a company or manager you’ve never heard of. That’s a sign that this might be a better marketing idea than it is a fund idea.”

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Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at [email protected] or at the Boston Globe, P.O. Box 2378, Boston, MA 02107-2378.