Top stock fund is still a bad bet

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BOSTON (MarketWatch) — In the mutual fund business, performance forgives all sins. But when investors overlook flaws that would be deal-breakers if not for good recent results, they're headed for trouble.
Consider Berkshire Focus Fund BFOCX -1.20%  , which had the best performance of any technology fund in the year’s first half, according to investment researcher Morningstar Inc. But despite that strong showing — and even because of it — this fund is the Stupid Investment of the Week. Stupid Investment of the Week showcases concerns and characteristics that make a security less than ideal for average investors, in the hope that spotlighting trouble in one situation will make it easier to avoid elsewhere.
The one tradition for this column — which is not intended as an automatic sell signal — is that a fund leading its peer group as the year reaches its midpoint always earns a booby prize for its fast first-half results. The basic premise is that hot funds with fabulous but volatile short-term performance regress to the mean, so investors who buy after the hot streak only experience the next downturn. Yet the calendar itself does not dictate the sustainability of an investment track record; sometimes momentum can be sustained long enough so that a shareholder who jumps after a hot fund could come away happy.

That said, if you wanted to bet on which funds would be unable to sustain momentum, it’s the ones with characteristics that typically send a fund to the dog house. Even all-time losers such as the now-defunct Steadman Funds, American Heritage Fund or Frontier Micro-cap Fund — which generated massive losses for anyone fool enough to stick with them — topped the charts for three- or six months. ... Continue to read.