Don’t be a fan of long-term laggards

The

Pittsburgh Pirates just clinched their first winning season in more than two decades, and what made the longest stretch of losing seasons in major professional sports history remarkable was not the on-field results so much as that the team had any fans left at all to see this year’s renaissance.

It’s not that long-suffering Pirates fans haven’t had things to cheer about since 1992— the last time the team finished with more wins than losses— it’s just that there hasn’t been much.

Of course, baseball fans stick with home team; they’re invested in the memories, the personalities and uniforms they grew up with, forging a rooting allegiance that runs deeper than wins and losses.

You wouldn’t think that would happen in mutual funds. Barring some circumstantial reason, like a fund’s appearance as the only option in its asset class in a retirement plan, giving a saver no real alternatives, it’s hard to imagine investors sticking around with a bad fund for long. And yet it happens. We’re not talking fallen angels, funds that have reached the performance pinnacle long enough to attract some attention— and investor cash — only to fall back to earth when the market cycle shifts. We’re talking long-term laggards that have somehow not only escaped the ax— fund companies typically kill off their weakest offspring— but that have managed to survive and hold onto assets despite records even a Pittsburgh Pirates fan might think were bad.

Years ago, the Steadman Funds were universally reviled as the industry’s worst fund family, and as their issues literally shrank down to zero, it was mostly assumed that the shareholders had stopped paying attention. The funds were nicknamed the “Deadman Funds,” because only a stiff would have suffered for so long.

But in Lipper Inc.’s research database, there are two equity funds, and a bunch of moneymarket funds, that have actually lagged their peer group for 20 years in a row, never finishing in the top 50 percent of their category.

Dreyfus S&P 500 Index (PEOPX) has $2.7 billion in assets, and Nuveen Equity Index A (FAEIX) has more than $750 million, which seems unlikely given how investors typically hate it when a fund can’t at least come in around the top 50 percent of its peer group year after year.

While Morningstar Inc.’s category data and methodology is different— so that no funds with a 20-year track record have lagged more than half of the competition every year— its numbers also show some stunning also-rans, funds that have a 20-year record but that fall in the bottom 25 percent of their investment category over that stretch.

There are about 185 funds in the group, running from recognizable names like Fidelity Emerging Markets (FEMKX) or Invesco Technology (FTCHX), both in the dead-last percentile for their peer group over the last two decades, to T. Rowe Price International Stock (PRITX), Fidelity Magellan (FMAGX) or Fidelity Growth & Income (FGRIX), big-name funds that have survived without thriving.

Interestingly, most of the names of these long-term laggards would not be in anyone’s Hall of Shame. Many get middle-of-the-road ratings and rankings from Morningstar and Lipper. While Fidelity Emerging Markets, which has $2.5 billion in assets, gets a one-star rating and a neutral analysts’ ranking from Morningstar, T. Rowe Price International Stock (with over $11 billion in assets) gets three stars and a silver rating.

And that explains how these funds survive despite being long-term disappointments.

Fidelity Magellan and Growth & Income, for example, have both returned roughly 6.3% annualized over the last two decades, lousy in their peer group but not horrible for the average investor looking for something staid and safe, who was expecting returns of 7% to 10% over time.

The funds disappointed compared to peers, but without any major blow-up that would panic complacent shareholders. Had these funds been truly awful at any point in time, investors would have fled; instead, by simply underwhelming investors the majority of the time, inertia took over.

It’s like Pirates fans, who managed to have a good time if they went to the ballpark, even if the team was never competitive for more than a month or two at a time.

Ultimately, however, investors shouldn’t be satisfied with long-term mediocrity.

Just as investors are told to stay the course and look at the long-term picture so that they don’t blow up financial plans based on current events, they should see that when funds disappoint over many years, the effects are devastating. A fund like Magellan, which has lagged its category by roughly 1.7% per year for the last 15 years, won’t send an investor to the poor house, but it won’t allow them to reach Easy Street either.

You don’t need a fund that wins the title of top dog every year, but being in the race— staying above the category average— in most years is important. Failing that, remember that your fund is not your hometown team; your only rooting interest should be for what cheers up your own portfolio. cjaffe@MarketWatch.com