Charles A. Jaffe: The Fool's newest take on mutual funds

If you wanted to uncover everything wrong with mutual funds in one fell swoop, you might turn to the Motley Fool, the financial-services company/online community that spent its 15-year existence finding crafty ways to call funds and fund investors stupid.

There are Fool books and articles and speeches about how active management seldom works, and how the best fund managers are the ones with long, consistent records and ultra-low costs.

But the Fool has always liked to jab its collective finger in the eye of nonbelievers, so the Web site's "Mutual Fund Center" - its basic introduction to fund investing - includes this gem: "Here are four words that'll serve as the foundation - heck, make that the foundation, walls, roof, and wall-to-wall shag - for your long-term success in investing in mutual funds: Buy an index fund."

Or there is the article on the site, updated this month, in which the author is "here to steer you away from dastardly mutual funds and toward more sensible investments." She goes on to call fund investors "beslubbering, flap-mouthed harpies."

And they mean every word of what they say, except where it might be applied to their own, brand new, actively managed Motley Fool Independence Fund.

In December, the Motley Fool announced it was going into the asset-management business, all built around its core investment philosophies and straightforward-yet-tongue-in-cheek communications. The new mutual fund - currently in registration so the company's officials would not discuss it with me - is one of the seedlings sprouted from the new business.

"For years, we have pointed out that most money managers underperform the market - as a case in point, over the past 15 years, some 80 percent of mutual funds have lost to the S&P 500," the company's cofounders, Tom and David Gardner, wrote in announcing their money-management efforts. "But we believe products that adhere to the investment philosophies advocated by the Motley Fool can offer a superb alternative to most investment vehicles available today."

Whether the asset management lives up to the hype remains to be seen, but the one thing we know about the Fool is that it is never dull.

For proof, Motley Fool Independence has what may well be the best prospectus in the history of the fund industry, a mix of the standard folderol and gobbledygook, with glib footnote explanations. So when the prospectus explains that "The fund pursues its investment objective by investing primarily in common stocks and equity-related securities of U.S. companies and of companies that are organized in other countries around the world," the linked footnote says "We regard the entire world as our market and the fund invests its assets (i.e., your money) accordingly."

Nice.

But a great prospectus does not make a fund worth buying.

In 2004, the Motley Fool also went against its history of hating on funds to start an investment newsletter, Champion Funds, which has provided good-but-simplistic fund advice ever since. But if you look at that publication's "7 Secrets to Beating the Market's Return with Mutual Funds," - an intro piece for the newsletter at Fool.com - you'll note that its top "secret" is to "look for seasoned fund managers."

As the Independence Fund prospectus notes, in footnote 28: "We're sure you've heard that 'past performance is no guarantee of future results.' The adviser and members of its investment committee do not have past performance managing a mutual fund or other client accounts."

So much for seasoned management and proven strategies.

"Secrets" numbers two and three amount to looking for consistent management, and picking funds with low fees.

Obviously, with the Motley Fool's leaders turning from fund bashers to fund cheerleaders (for the newsletter), and now fund managers, consistency could be an issue. And the fund's total operating expenses are north of 2 percent, though an expense waiver brings costs to 1.35 percent; that's about average for a stock fund, but hardly "low fee."

Forget three secrets, that's three strikes making an out.

And while the firm's newsletters have a good performance track record, the mutual fund world is littered with the carcasses of newsletter editors who branched out into funds, but whose published strategies failed to deliver the same results when facing the restrictions that come with running a fund.

It will be interesting to see how the whole escapade turns out; starting a mutual fund now has enabled the new issue to avoid the market's recent carnage and might make it look attractive when the market picks up and it has three to five years of history behind it, but it also might be the marketing move of a financial-services firm that, like many in the industry, is grasping at straws right now.

For now (if not forever), Motley Fool Independence is precisely the kind of fund - new, unproven, built on hype more than track record, a bit gimmicky (much as I love the prospectus, it's part of the whole shtick) - that the Fools themselves would probably ridicule an investor for buying. To quote one of their fund-bashing articles, only a "puking, ill-breeding canker-blossom" would take a chance on it.