My first day of college -- oh, about 100 years ago -- I recall sitting in the midst of 300 or so other Psych 101 students as the professor explained his grading strategy, why A's would be so hard to come by, and the venerable "gentleman's C" nonexistent.
"Class," he said, "I already know you are all smart -- otherwise you wouldn't have gotten into this college. But my job is to assign grades so as to separate out the truly brilliant from the merely intelligent."
This week, the folks at NerdWallet.com set themselves an even tougher task: to examine 13,000 of the nation's largest mutual funds -- 65 percent of which underperform the S&P 500 index of America's largest stocks -- and cull from this mass the truly abysmal, versus the merely awful.
Now obviously, we won't be investing in any of these funds, and if you're lucky, you haven't either.
But what can we learn from NerdWallet's rankings? What did these financial titans do wrong that wound up putting them on the equity-naughty list, and getting made fun of, in public, by a bunch of number-crunching "nerds"?
The answers vary. For example, you can probably assume that Rydex was doubly cursed by first trying to short U.S. government debt on the theory that "QE Infinity" would wreck the value of the dollar, then doubling down with a bet on precious metals soaring in value on the same theory.
DWS probably fell into the same trap with its Gold & Precious Metals Fund, while similar bad choices were made at Ivy Global (natural resources commodities) and Oppenheimer (commodities in general). Meanwhile, DWS may have simply picked the wrong Latin American companies to buy, and ALPS the wrong private equity funds to invest in.
However, one thing all these funds have in common (aside from miserable returns) is that they charge way too much for their underperformance.
The average fund on this list charges 2.4 percent in management fees -- that is to say, for every $1,000 you invest in them, they charge you $24 a year, year in and year out, even as they lose you money. Adding insult to injury, you have to recall that the average high-class hedge fund only charges its customers 2 percent (plus a cut of the profits -- of which these guys earn you none).
In the best of all possible worlds, if these funds were able to outperform 65 percent of their brethren and just match the 10 percent annual returns on the S&P 500, those fees tacked on at the end would still eat up close to 25 percent of your profits.
In other words, they'd guarantee that you underperform the market no matter what.
You Can Easily Do Better
So how can you do better? How can you at least beat these 12 losers, and hopefully outperform a majority of mutual funds, overall?
The simple answer is to buy yourself a nice, boring index mutual fund such as the ones rated five stars on NerdWallet's proprietary search engine for the "Best Index Funds." These tend to charge low fees, and generally speaking, anything with "Vanguard" in its name is probably going to be a good bet for you, and likely to stick pretty closely to the returns of the index it's tracking since this fund family is known for its low expenses.
If you're feeling lucky, though, and want to try your hand at locating a better actively managed mutual fund, NerdWallet has a tool for that, too: a list of the "Best Actively Managed Funds." These funds tend to outscore their peers on the profits they make over five-year periods, and charge significantly lower fees than the Dirty Dozen outlined up above.
Where should you start? Well, just taking a quick gander, it appears that funds operating under the Fidelity and American Funds brands tend to score highly on overall profits performance. American Funds scores well, again, on the low fees it charges for its services. So too does Strategic Advisers, which offers a pair of "US Opportunity" funds that have returned mid-teens annual profits over the past five years, yet charge only a small fraction of a percentage point in fees for the privilege.
Whether they can keep up the outperformance is anybody's guess -- but the low fees, at least, should stick. And those alone will set you up to outperform NerdWallet's Dirty Dozen.
A dyed-in-the-wool stocks-only investor, Motley Fool contributor Rich Smith owns none of the mutual funds named -- neither the good nor the bad.
Fortune 500 Companies That Secretly Run Your Life
The 12 Worst Mutual Funds Money Can Buy
The Big 3 carmakers get plenty of press, but what about the carmaker makers? Enter Johnson Controls, a deceptively under-recognized name for its contribution to one of the most consumer-focused industries.
Johnson Controls(JCI) makes much of that cushy seat-foam that lets you ride in cars in comfort. The company is the world's largest supplier of "seating solutions," a segment that pulled in $15.5 billion in sales for the company in 2012. Johnson Controls also makes products tagged to the construction industry such as heating, air-conditioning, ventilating and security systems.
The company has broadened its reach well beyond its roots. In 1885, Warren Johnson, developer of the first electric room thermostat, founded Johnson Controls to sell his invention. Johnson Controls was also first to market with lithium ion batteries for hybrid cars, and is currently the biggest supplier for battery technology for vehicles. It also makes driver information display panels, floor consoles and those garage-door clickers that are integrated to the interior of the car.
You can't tell by the company's name what it does, exactly. CHS Inc., however, has its hands in a wide range of lucrative industries: petroleum products, chemicals, food and financial services. The company is owned by United States agricultural cooperatives and has been ever since it was founded in 1929 as the North Pacific Grain Growers. In 2003, it changed its name from Cenex Harvest States Cooperatives to CHS Inc., keeping Cenex as the name for its energy business, and offering preferred stock and non-voting ownership to investors.
Today, the company is not necessarily the No. 1 player in any of the categories it's involved in, but sweeps in at second or third place in a variety of categories. CHS is the nation's third largest U.S. grain exporter, and the third largest U.S. propane retailer. It has a joint venture with Ventura foods, a major manufacturer of bulk margarine. And while it is by no means up there with the Exxons of the world, CHS sells more than 3 billion gallons of refined fuels such as gasoline and diesel.
(Pictured is CHS's propane innovation from weed control to irrigation.)
It's got a pretty hands-off name, but United Technologies(UTX) is a manufacturer with many arms, and it oversees some of the U.S.'s most prominent brands. Sure, Boeing(BA) and Airbus make the news when they win or lose bids, but United Technologies owns Pratt & Whitney, the company that powers many of the planes those companies produce. And, of course, we all know Otis, the iconic elevator brand, which is a United Technologies company too. Manufacturer Sikorsky is another part of United Technologies' profile. And while Sikorsky may not ring a bell, it made the famous Black Hawk helicopters for the U.S. military.
Even less sexy but more pervasive, perhaps, is United Technologies bread and butter -- its climate, controls and security unit. The division made up the largest portion of the company's net sales in 2012 -- $17.1 billion out of $57.7 billion total.
Behind the drugs you buy is an entire industry built on supplying, pricing, and subsidizing those meds, which is where AmerisourceBergen (ABC) lives. The megapharma company was formed in 2001, when Amerisource Health Corporation merged with Bergen Brunswig Corporation. Today, the resulting hybrid handles 20% of all of the pharmaceuticals sold and distributed throughout the United States, and employs 13,400 people full-time.
The pharma industry has undergone consolidation, with companies forming even larger units to prepare for health care reform, when the government will become an even more powerful drug-purchasing competitor. So AmerisourceBergen signed a three-year contract with Express Scripts, which had just bought Medco Health. Both Express Scripts and Medco are pharma suppliers and consultants. In 2013, AmeriSourceBergen penned a deal with Walgreen(WAG) and Alliance Boots. The deal could give the triad the purchasing power to buy more generics than any other purchaser in the industry.
Archer Daniels Midland Company has been around since the turn of the century, when George Archer and John Daniels went in together on a business based on crushing linseeds. ADM(ADM) has flown under the radar aside from a press spike when it got caught up in a price-fixing scandal during the 1990s, which was featured in the 2009 movie "The Informant."
By that time, the company had somewhat righted its reputation -- it was ranked the Most Admired company in the food Industry on Fortune's 2009, 2010, and 2011 lists.
ADM is known primarily for its involvement in the corn industry, but its reach extends far beyond that. ADM still crushes linseeds and other oilseeds, for example. In fact, strong global demand for those products protected the company this past year from drought problems in the U.S. that hurt harvests and lowered levels on the Mississippi River, a major ADM shipping channel.
ADM is also one of the largest milling companies anywhere, processing 20 acres of wheat per-minute, all over the world. If you've got a sweet tooth, ADM is one of the largest cocoa product producers and owns roughly 16% of the ground cocoa market. If you raise pig, horse, fish or any of several other animals, ADM cranks out the corn- and soy-based products to feed them.
McKesson was around during the old days of the American medical industry. In 1833, John McKesson and Charles Olcott formed the company in New York, starting out stocking medical ships coming to port with chests full of herbs, roots and spices from Pennsylvania Shaker communities.
Medical services, of course, have come a long way, and so has the company, which is now the largest pharmaceutical distributor on the continent. McKesson(MCK) peddles more than 150,000 medical-surgical products, including bandages and exam tables, and, it claims, offers healthcare solutions that touch "more than 160 million covered lives."
No more a conduit for Shaker spices, the industry today involves selling a much murkier product called "health solutions," which guides clients through the coverage levels they should offer, among other things, and "provider technologies," which aim to help clients deal with the digitization of medical records. Over half of all "health systems" in the United States use McKesson's technologies in this category. It's lucrative -- McKesson nets more than $123 billion in annual revenue.
Also, McKesson is building a medical robot army. Every year, according to the company, "More than 300 Robot-Rx pharmacy robots deployed in North America dispense 350 million medication doses error-free." The future of medicine, ladies and gentlemen.
Lurking behind the health care debate are, of course, the companies that provide health care. Though it sounds like some kind of futuristic supercontinent, Humana(HUM) is actually the fourth largest provider of health care in the United States, with nearly 30 million policyholders.
The company, with its headquarters in Louisville, Ky., is poised to thrive as health care reform shapes the industry. Humana brought on 2,900 new care management professionals in 2012. Though costly, the price of that and other operational solutions should be offset by other areas in which the company made a profit. For example, the flu, though bad for your respiratory system, was good for Humana's bottom line. Incremental costs from increased hospital admissions, thanks to the flu, should earn Humana $75 million for 2012 and 2013.