BIG CHANGE IN DIRECTION FOR FUNDS THAT DARE NOT SPEAK THEIR NAME; FORGET, SHH, STEADMAN: NOW THEY’RE AMERITOR

A rose by another name may smell more sweet, but investors may want to watch out for thorns.

Ameritor Funds is in registration with the Securities and Exchange Commission to open its red-hot Security Trust Fund to new investors as early as the end of this month. The $4.5 billion fund, which has nearly tripled the return of the Standard & Poor’s 500 stock index over the past 12 months, is the top-performing large-cap blend fund tracked by Morningstar for that period, with a total return of 54.7% to the S&P’s 18.5%. But buyers beware: This flavor-of-the-month fund also is the worst performer in its Morningstar category over 15 years, with a 5.2% annualized return.

Of course, for much of that time, it was known as the Steadman Security Trust Fund.

That’s right. Ameritor is the new and improved appellation of the perennially dysfunctional Steadman family. Infamous for sky-high expense ratios coupled with spectacularly bad performance – the American Industry Fund fell 50% from 1960 to 1997 while the S&P 500 Index rose nearly 1,500% – Steadman Funds were universally unloved. In 1989, the SEC even forced Steadman to close its four funds to new investors because it hadn’t properly registered them.

When patriarch Charles Steadman died in 1997, though, the woeful group fell into the lap of Max Katcher, the longtime Steadman treasurer. Mr. Katcher, who says he had nothing to do with fund management until then, set out to clean house by renaming the company and merging the four funds – which had combined assets of less than $7 million – into one.

where did shareholders go?

The latter effort failed last year when management couldn’t muster enough votes in each fund for a quorum. The problem: 25% to 30% of investors couldn’t be found – having written off the funds for dead, or perhaps having died themselves waiting for improved performance.

Mr. Katcher says Ameritor Funds is still in the process of working through those abandoned accounts, turning over unclaimed assets to the states. Meantime, he has liquidated the worst offender – Technology and Growth – and vowed to make a go of the remaining three.

So far, so good. Very good, in fact.

By avoiding Mr. Steadman’s highly leveraged, high-turnover style in favor of a buy-and-hold strategy, Mr. Katcher has quickly and dramatically improved performance.

The $1.6 billion Ameritor Investment Fund, which has a 15-year annualized return of just 0.2%, returned 44.7% over the past 12 months. The tiny Ameritor American Industry Fund – it holds just $800,000 – rose 8.6% over the same period.

“My predecessor’s philosophy was to trade often,” Mr. Katcher says. “That resulted in a turnover as high sometimes as 300%. My own philosophy is if you have a good stock, you keep it.”

Mr. Katcher will consider opening the other two funds once Security Trust is through registration. Among the keepers that have lifted his technology-heavy portfolios: Microsoft, Intel, Cisco, Sun Microsystems and MCI WorldCom.

As for those ludicrous expense ratios, Ameritor Security Trust’s is currently 7.3%, Ameritor American Industry’s is 22.6%, and Ameritor Investment’s is 6.5%.

Mr. Katcher says the problem is that the funds don’t have enough investors. The only way to lower the ratio, he says, is to attract new investors and spread costs: “We certainly want to be in line with other funds in terms of expense ratios.”

They’ve got a long way to go: Most large-cap funds’ expense ratios are around 1.5%. Moreover, notes Kevin Thornton, chief operating officer of Standard & Poor’s Fund Services, very small funds kick off all the time with much lower expense ratios than Ameritor’s.

Bad vibes behind them?

Still, the biggest obstacle Ameritor is likely to face is its history. “They’re still carrying quite a bit of baggage,” says Mr. Thornton. “Branding is everything in this marketplace and this brand, well, I don’t know if they can shake off the associations.”

Time will tell and, Mr. Thornton notes, not enough has passed to judge whether Ameritor is as good as Steadman was bad. Most investors look for an impressive three-year track record, no matter how high more-recent returns may be.

Mr. Katcher is used to such skepticism. He’ll try an end run around industry naysayers by marketing his products directly over the Internet.

“We really don’t intend to use brokers – they don’t have any real interest in selling a no-load fund anyway,” he says, adding that he has received many expressions of interest directly from individual investors and advisers.