When is a fund a gimmick?
Experts: Golf, racing, other special funds may be mere marketing ploy
NEW YORK (CNNfn) - John Allen knows chances are pretty slim that Fidelity Investments will steal his idea.
After all, Allen's stock car racing mutual fund isn't exactly an investment vehicle for everybody. But even if the name sounds gimmicky, Allen argues the stocks in the fund are as mainstream as you can get.
"Ultimately mutual funds are consumer products, and they have to appeal to people to get bought," said Allen, chief executive of the StockCar Stocks Mutual Fund.
With thousands of mutual funds to choose from, it's probably no surprise that you can find one that invests in stock cars.
There are socially-responsible funds and sector funds that focus on specific areas of the market like technology or utilities. There are country funds that stay within the borders of one nation. There are "focused" funds that own just a handful of stocks.
But there are also funds that invest in death-care businesses and funds that buy companies that are friendly to gays or women. There's a golf fund and a Y2K fund.
The trick is that the line between a specialty fund and a gimmick fund isn't clear-cut, said Peter DiTeresa, an analyst at Chicago fund-tracker Morningstar.
Gimmick or niche?
DiTeresa said the stock car racing fund and the Golf Associated Fund are gimmicks because they invest in S&P 500 stocks under a label of racing or golf. The funds invest in blue chips that sponsor racing and golf events, which makes them something like consumer staples funds, he said. At the same time, the expenses are higher than if you bought an S&P 500 index fund.
For example, the stock car fund, an index fund, is up 23.5 percent since inception in October 1998, compared with 32 percent for the S&P 500 in the same time, DiTeresa said. (Click here to see the companies in the index).
At the same time, the stock car fund charges 1.5 percent a year, which is much steeper than the 0.25 to 0.50 percent you'd pay for an S&P 500 index fund.
"The thing that's most off the wall about these funds is they're charging people additional money they could get through an ordinary mutual fund," DiTeresa said.
Allen, like Michael Williams, president of Golf Investment Management and a portfolio manager of the Golf Associated Fund, disagree with the gimmick moniker.
"The idea is for people who love golf, this is the place to go," Williams said. "It's a good, quality fund."
Allen argued that 1.5 percent is reasonable if you consider that a portfolio of $2,000 would pay $30 a year.
"Racing is a $2 billion-a-year industry," Allen said. "Half the people who invest in our fund have never invested before. They don't know a stock from a bond. They like stock car racing."
What they own
The stock car fund owns traditional racing names like International Speedway (ISCA), which is working with developer Donald Trump to build a race track in the New York City area. It owned Penske Motorsports, which is up 84 percent this year and was recently acquired by International Speedway, he said. And it also owns CBS (CBS) and Disney (DIS), parent of ABC and ESPN, which broadcast races on television.
Some of the biggest investors in International Speedway are institutional names like Putnam and Fidelity, Allen said. The fund owns 59 companies, including 41 in the S&P 500 and 13 from the Dow Jones industrial average.
Williams said there are only about 20 publicly traded pure golf companies. Of that number, only about 10 are worth owning, he said, such as Cutter & Buck (CBUK) and Callaway Golf Co. (ELY) The fund also owns Caterpillar (CAT), maker of golf carts.
The golf fund, tiny with just $1 million in assets, is up 3 percent year to date as of Friday.
DiTeresa said the first gimmicky fund he can recall was the Sports Fund about four years ago. But the fund closed within two years because it couldn't attract new assets, he said.
Sheldon Jacob, editor of the newsletter No-Load Fund Investor, said special interest funds are nothing more than marketing ploys. The problem is they normally get started when a part of the market is doing really well -- so investors have missed out on most of the upside.
The Internet gimmick?
For example, a rash of new Internet index funds have debuted, Jacob said. But they missed out on most of the big upturn over the past year and started when the sector has been struggling.
"If you pick 50 Internet companies today, how many do you think will be around five years from now?," Jacob asked.
DiTeresa would instead recommend a more general technology fund that is more selective when it comes to Internet names.
"Internet funds certainly smack of being gimmicky," DiTeresa said. "It's still unclear who the ultimate winners and losers will be. It's a squishy area."