Don't Shun the Newbie Fund


By Richard Diennor Just because a mutual fund has recently entered the world is no reason to ignore it, financial planners and others say. "If it's a new fund with a manager who's very experienced" in a certain type of investing, "then it's worthwhile to look at," says Rosanne Pane, mutual-fund strategist at Standard & Poor's. Conversely, investors should "be very cautious" in approaching a new fund with an unproven manager, she notes.

While newly introduced funds lack performance history, which many people prefer to see before turning over their money, past returns may not indicate future gains, Pane says. That's partly because how well or badly a fund has done is more or less related to what happened to that style in the market, she says.

Standard & Poor's data showed 353 funds were introduced in 2003, and 444 more came on line last year. Another 47 debuted this year through April.

DOUBLE-EDGED SWORD. A potential advantage of funds that have just begun operating is that they often are small and own only a handful of stocks, so they can grow faster than larger, established competitors. The average fund launched in 2004 ended the year with $73 million in its coffers, according to fund tracker Financial Research Corp.

Only two products that debuted in 2004 captured more than $1 billion in assets, FRC says. One was an exchange-traded fund, streetTRACKS Gold Shares (GLD), which attracted $1.4 billion, and the other was an institutional mutual fund, GMO US Quality Equity/IV (GQEFX), which took in $1.2 billion.

A small asset base can be a double-edged sword, however, since it can increase a fund's expenses. So investors should pay close attention to such costs, observers say.

BEWARE FADS. They also agree that fund companies frequently bring out portfolios focusing on certain types of investments that have been in favor. "You'll see funds and products developed where you think assets will go," says Sean Seabold, a financial planner in Naperville, Ill.

Pane urges caution in considering new funds that invest in hot sectors because they can cool rapidly, as technology and Internet stocks did when the tech bubble burst in 2000. "You want to make sure you're not jumping on a style that's suddenly become in favor," Pane says. "You might wind up going into a fund just when the trend is turning."

There are times when investors may be forced to consider an untested fund, says Roger Wohlner, a financial planner in Arlington Heights, Ill. For instance, established funds that invest in certain asset classes, like small-cap stocks, often close to new investors to limit their asset size, he notes.

STUDY THE TEAM. Seabold says he leans towards new products from big, established fund complexes over firms that are just starting out. Older companies have a bigger stable of managers who can step in if one or more leave, he says.

Standard & Poor's suggests looking past a new fund's wrapper and examining the quality and experience of the team managing the portfolio, as well as its track record and investment discipline. Pane says: "Objective and qualitative information on managers and the fund firm is important since it helps investors understand the fund better and can provide guidance on what to expect going down the road." Diennor is a reporter for Standard & Poor's Fund Advisor


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