Morningstar Issues Red Flag Alert for Three Mutual Funds (Vanguard Capital Value, Fidelity Pacific Basin and Fidelity Convertible Securities)

Morningstar has issued caution to investors owning these funds. Here's why. Investors in Vanguard Capital Growth have lost 52% (49% in the last three months alone) because the new fund manager, Peter Higgins, is a "fast trader who made big sector bets" at his former firm (Dreyfus) and that trait appears to be repeating itself. Now, at Vanguard, Higgins made an ill-fated bet on Research in Motion, and has 5% of the fund's assets in companies that "were essentially rendered worthless in September." Morningstar expects this "extremely volatile", "bumpy ride" to continue and urges investors to "watch from the sidelines."

Likewise, Fidelity Pacific Basin has lost 61% this year, the worst in its category according to Morningstar. That's due to the fact that the fund manager "focuses much more heavily on smaller companies than his rivals … and the fund's stake in less-developed markets is higher than average." Morningstar doesn't see much reason to own the fund given its "immense risks and the misfires here."

Finally, Fidelity Convertible Securities has suffered alongside its peers due to the plunge in the convertible-bond market. But while the typical fund in this category is down 37%, this fund is down 51%. That's because the manager, Tom Soviero (who also runs Fidelity Leveraged Company Stock) "focuses on converts with a great deal of sensitivity to equities, runs a relatively concentrated portfolio, and bets big on particular sectors." The fund is worthy only for investors "with strong stomachs."