Morningstar tells remaining investors to dump Schwab YieldPlus

Charles Schwab’s money management unit was hardly the only shop burned by putting dangerous subprime-backed investments in supposedly conservative short-term bond mutual funds. Fidelity, Evergreen and others also had losses when the subprime market blew up starting last summer. But the experience of investors in the once almost $14 billion Schwab YieldPlus Fund (SWYPX), who have now lost over 30% of their money, is by far the worst, Morningstar notes in a recent write-up. Once shareholders started heading for the exits, Schwab managers had to sell illiquid assets at the worst possible time, magnifying the damage and making it impossible for the fund to recover if the market ever bounced back.

Still, the fund had over $500 million in assets at the end of last month. Morningstar analyst Miriam Sjoblom has a simple message for those remaining folks:

Shareholders have been effectively liquidating the fund already: It has experienced the greatest amount of net outflows of any mutual fund this year, with net assets dropping to $524 million at the end of July from $6.5 billion at the start of 2008. Remaining shareholders would be better off following suit.

Former shareholders should also watch the headlines for developments about the class action lawsuits filed against Schwab over the fund’s losses. U.S. District Judge William Alsup in San Francisco consolidated nine suits and appointed lead plaintiffs attorneys last month.

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