Strangely enough, there is no discernable pattern to why these funds are so bad, according to Roy Weitz, editor of FundAlarm, a Web site offering information on when to think about cutting loose a poor fund.

"With apologies to Dostoyevsky, it often seems that each poorly performing fund is poorly performing after its own fashion," he said. The funds come from well-known and unknown families, and can be anywhere from 50 to five years old.

Excessive fund expenses can be the key to some struggling funds. The Steadman Technology fund has a total expense ratio of 41.46 percent, which comes directly out of any returns for its holders. The next worst fund, Frontier Equity, has an expense ratio of 12.29 percent.

Analysts estimate that your expenses for a stock mutual fund should not exceed 2 percent, while your expenses for a bond mutual fund should remain below the 1.5 percent mark.

Funds that are out of synch with their peer group can also lag behind, said Doug Fabian, president, of Fabian Investment Resources.

"This usually happens when a manager is trying to anticipate the market," said Fabian. "He may be carrying too much cash," said Fabian, who issues his own version of funds to avoid, known as the Lemon Funds list.

Fund companies are often slow to make the changes that might turn things around even if the fund has been struggling for a long time, he said, since the trustees who oversee the funds are often employees of the management company.

"They are reluctant to replace managers who work for the same company they do," he said.

If these funds are so bad, you might be wondering why they have any money to invest (and lose) in the first place. Isn't the fund marketplace efficient, with money flowing from poor funds into heavy hitters?

In the minds of investors, bottom lines and dollar figures often get ignored due to psychological reasons, explained William Goetzmann, professor of finance at the Yale School of Management.

Goetzmann studied why investors stick with these struggling funds and found that "cognitive dissonance" played a part, meaning Wall Street is telling them one thing, but their personal feelings are telling them another.

"People are selective about the information they collect about their mutual funds," he said. "People like to think that they made a good choice in the past and don't like to look at evidence that their fund did poorly."

In his 1997 study, he asked people how their mutual funds were performing. He found that investors consistently thought their funds' performance was better than the returns actually were.

A bull market has facilitated this positive view. Almost every fund has a few good days or weeks, leading even a disgruntled investor to think that good times are just around the bend.

Even some success can be overrated. "Some of the poorer funds are up 20 percent in the last year," said Fabian. "People are saying 'Yeah, I'm making money!' but when you look at the overall market, 20 percent was not that good."

"It's the bull market that has created this complacency."

In the case of the Steadman funds, however, there may be a more simple answer as to why people still have their money in a poorly-performing fund; they're dead.

In 1993, the Unclaimed Property Clearinghouse, a government organization, filed to recover money from these funds that belongs to fund holders who are now dead. Estimates at the time indicated that possibly 20 percent of each fund's assets belong to fund buyers who are deceased.

While it may be easy for holders of the worst mutual funds to decide to call the bullpen for a reliever, those of us who have the everyday type of underachieving mutual fund may face a tougher decision.

Investors find themselves bombarded with contradictory advice. On the one hand, your fund is not doing as well as its benchmarks. On the other, every investment advisor tells you to look at stocks for the long haul. The market always goes up over time, they say, don't worry about temporary downturns.

Additionally, most financial information tends to focus on the top-performing funds, so there are fewer sources of information about struggling ones. If your fund isn't one of the hottest, there may be no one pointing out that it's one of the worst.

Start out by picking a benchmark that you will use to evaluate the fund's performance, said the FundAlarm's Weitz.

"If your fund's performance consistently trails its benchmark for 12 months, three years and five years, you should strongly consider selling," he said.

Comparing it to similar funds, known as its peer group, is another way to figure out if your fund is particularly poorly managed or just slumping along with the rest of them.

All of this requires you to be diligent about monitoring your funds performance, perhaps more than you ever have before. Put your mutual fund through a regular review process and stick with it.
-- by staff writer Randall J. Schultz