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Say hello to mutual funds' "lemons'

Investors don't recognize that a mutual fund they own is an underperformer unless it actually loses money, says Doug Fabian, a publisher of investment advisory newsletters.

So, to clear that clouded vision, Fabian has published a "lemon list" of what he calls America's worst-performing mutual funds.

After analyzing more than 6,000 mutual funds, Fabian came up with 89 that he says have habitually underperformed their peers during the last one-, three- and five-year periods.

And they charge a good deal for that underperformance: The 89 funds, whose combined assets are more than $66-billion, carry an average expense ratio of 1.5 percent, Fabian said.

He plans to publish a new "lemon list" each quarter.

The top 11 funds on the current "lemon list," as measured by asset size and expense ratio, are Smith Barney Premium Total Return; Sogen International; Warburg Pincus International Equity: Advisor; Templeton Global Small Companies I, II; Dean Witter Worldwide Investment; Crabbe Huson Special; Merger Fund; Merrill Lynch Global Holdings; Phoenix Mid Cap; Ivy Growth Fund; and Royce Premier Fund.

"Everybody's afraid to make a solid call against underperformance," Fabian said. "And I think we've come up with some good criteria by not just focusing on average performance."

Fabian analyzed all domestic, global and international mutual funds, both load and no-load, as of March 31. To land on the "lemon list," a fund has to trail its peer group average in all three periods checked, including at least a 25 percent underperformance over the past year.

"These funds are unequivocally, without a doubt, the worst-performing funds in the industry, and they should be sold. There's no discussion needed," said Fabian. "I don't want to hear that the fund manager has changed. These funds are lemons and they need to be changed."

With just a little homework, investors can easily find suitable replacements for poor-performing funds, Fabian said. "There are great funds to be associated with in the mutual fund industry," he said. "If people want to take advantage of all the industry has to offer, they need to look at their portfolios and let go of the underperformers."

Fabian is the president of Huntington Beach, Calif.-based Fabian Investment Resources, a subsidiary of Phillips Publishing Inc. of Potomac, Md.