Attractive funds can be dangerous

Bob Quinn wanted a tech fund with a big slug of his favorite stocks, so he queried a search engine for funds invested in Google, Apple and others.

What he got was the Berkshire Focus fund (BFOCX), the kind of high-cost, extremely volatile issue that typically is best to ignore. Quinn, of Foxboro, Mass., quickly learned that the fund — which has just $18 million in assets — was not "blue-skied" in his home state, fundspeak for saying it's not registered for sale there. That meant he could not buy it through his brokerage or direct from the company. The brokerage and Berkshire quickly rectified the problem, allowing Quinn to make a December purchase.

Quinn's confidence was bolstered by a few factors. Not only did Berkshire Focus hold the stocks he favors, its name invokes images of Berkshire Hathaway, the company run by legendary investor Warren Buffett. And the fund's manager, Malcolm Fobes III, had Quinn thinking the money was being run by a member of a famous investing family.

Then, in doing some online research, he came across a Web site suggesting the fund is a scam, and that manager Fobes (it's his real name) was trying to make people think he was related to the late billionaire Malcolm Forbes. Moreover, the fund has Berkshire in its name, but no link to Buffett's company (in fact, the investment styles are practically polar opposites).

"I love the fund's holdings, but I'm nervous about these issues," Quinn said recently. "I've never heard of the 'blue-sky' issue or of a fund that couldn't accept someone's money. ... And the whole thing with the similar names concerns me that something strange is going on."

Blue-sky issues sometimes hit tiny funds. While large firms pay to register across the country, small companies may pick and choose states, cutting costs by registering close to home, in areas where a local following is the target shareholder.

While there can be blue-sky exceptions in some cases, Fobes simply is letting many state registrations expire, largely to discourage hot money (like Quinn's) that has come in during hot times only to rush out with the technology tide. With blue-sky issues settled, and the name confusion (Fobes describes the name similarity with Forbes as something of a curse), the whole case gets down to the biggest issue, namely whether any selection criteria that delivers Berkshire Focus make sense.

The fund was a triple-digit gainer in both 1998 and 1999, and has had jagged spikes of performance since.

Its annualized loss of more than 25 percent over the past five years makes it one of the worst funds for that period. Throw in a 2 percent expense ratio and a concentrated portfolio that has led to stomach-wrenching volatility and you've got a recipe for disaster.

Yet Quinn saw something, like the fund's strong performance over the past 12 months, a 35 percent gain that put it near the top of its peer group.

Chuck Jaffe is senior columnist at Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.