There was a skunk at the garden party known as the Morningstar Investment Conference here last week. In the packed exhibit hall, filled mostly with firms crowing over superior long-term performance, there was a booth for the Van Wagoner funds, widely recognized as one of the worst fund families in history.

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Financial advisers and individual investors would see the sign, stick their hands in their pockets to be sure they wouldn't pick up data sheets on Van Wagoner's losers, bow their heads slightly to avoid eye contact and rush a few steps to get to the neighboring exhibits for Hotchkiss & Wiley or Westwood.

Visitors at those booths who spilled in front of Van Wagoner's were quick to distance themselves from the troubled firm, as if they wanted to make sure that you knew the odd smell in the room was not coming from their funds. Mostly, the Van Wagoner official working the booth stayed away from her own table, lessening everyone's embarrassment.

But at a conference dedicated to celebrating the fund world's best and brightest, the very presence of Van Wagoner begged the question "What the heck are they doing here?"

The answer is an interesting tale.

The Van Wagoner funds weren't always such pariahs. In the early 1990s, manager Garrett Van Wagoner made his mark running the Govett Smaller Companies fund and broke off to hang out his own shingle. He was an investment star, with his funds attracting billions of dollars seemingly overnight; there were huge triple-digit gains in 1998 and '99. A $10,000 investment made into either Van Wagoner Emerging Growth (VWEGX) or Van Wagoner Small-Cap Growth (VWMCX) at the start of 1998 was worth well over $40,000 by the end of 1999.

And then the bottom dropped out. To Van Wagoner's credit, the guy who had been the toast of the Morningstar event during the bull market came back to speak when his fund was in the tank. Today, however, he's not invited, so he had to buy a spot in the hall to tell his story. A last-minute family situation kept Van Wagoner from showing up. He would have had a lot of explaining to do.

Three Van Wagoner funds were merged into the Growth Opportunities (VWGOX) fund in 2003; over the last three years, the combination has averaged a loss of nearly 2.5% each year to rank in the bottom 1% of its Morningstar peer group. That's a time when small-cap stocks — Van Wagoner's specialty — have been hot.

The other two funds have been significantly worse. Emerging Growth turned a $10,000 investment made at the end of 1995 into a $6,000 pile of mud today. It has lost an annualized 6.6% per year over the last three years. Small-Cap growth has lost 4% per year in that time.

Investors who stuck with the firm through that — presumably hoping they might someday get back to break-even — are living proof that sometimes it is better to just walk away from mistakes than to cling blindly to hope.

But the story at Van Wagoner was positive at the start of this year. All three funds were up from 17% to 22% during the first quarter.

"The funds had a really good first quarter, and then the market rolled over in the second and took us with it," says Julie Asti, a managing director for Van Wagoner's fund firm. "But Garrett has been making a lot of changes; he has really gone back to what worked in the Govett days and the early days of Van Wagoner. ... He feels like he has made a fundamental change in the way he manages the portfolios, and I think he was hoping to tell people — even the ones who had a bad experience with us — not to write us off completely, because there could be a story to tell here in the future."

The story is not likely to be the 290-plus percent gains of 1999 again any time soon. While the strategy change sounds promising — harkening back to when Van Wagoner was a star — it looks more like a drowning man flailing to stay afloat than like a confident swimmer changing from freestyle to backstroke.

And while Van Wagoner deserves some credit for the noble effort to keep going — most managers would have given up by now, and might have resurfaced with new funds and a clean slate — he probably doesn't deserve investing cash.

One constant from speakers at the Morningstar conference was the need to look long-term, to buy securities where an investor can think three or five years ahead and feel confident they will finish that time period with gains; Van Wagoner's track record, despite the occasional quarterly blip, isn't worth a flyer yet and probably never will be.

"You can understand a manager — and to some extent an investor — hoping that their glory days might return," said Morningstar's Russel Kinnel, "but that's not really much reason to buy a fund. Once you've been burned by a fund, it should take more than a good quarter or a change in strategy to get you to go back."

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