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New Funds May Do Better at First--but Look at Why

April 26, 1998|RUSS WILES | Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work."

Americans usually go for anything new, but when it comes to mutual funds, theconventional wisdom has been to put your money on the tried and true.

More than 500 stock and bond funds have debuted in the last year or so. Certainly, there may be some good reasons why you might want to invest in a new fund, and other reasons why you shouldn't. But is there evidence to support the idea that new funds perform better than established ones?

That was the question researchers at Charles Schwab & Co. in San Francisco tackled in a--you guessed it--new study.

The researchers counted the number of new domestic-stock funds that debuted in each of the past five years, then looked to see how many new funds were cracking fund tracker Moriningstar's annual list of 100 top performers.

If new funds do perform better, the reasoning went, they should account for a higher percentage of the top 100 funds, said Mark Riepe, a Schwab vice president who heads the firm's Center for Investment Research.

And, indeed, that is what the study found. Funds less than a year old accounted for, on average, 14% of all funds in existence during the five-year period, yet they made up 22% of the 100 best performers.

The contrast is even more striking among new funds that buy small stocks. These funds represented just 4% of all funds in existence, yet they accounted for 11% of the best performers.

Do such results imply that you should be jumping into promising new funds, especially funds that buy small companies?

Not necessarily, Riepe said. Here, as with almost any kind of investment statistic, you have to look at the reasons behind the numbers and consider what might make such a strategy infeasible.

The first problem revolves around volatility. New funds performed better, but they also subjected shareholders to greater risks. How and why they did this wasn't clear because the Schwab researchers didn't have access to each new fund's initial portfolio holdings, which need not be disclosed at the commencement of operations.

"It's probably due to the fact they buy more volatile stocks, or concentrate among fewer stocks" than most funds hold, Riepe said.

The second reason involves timing. Most of the superior gains came about just within the first six months after a fund was launched; but after 18 months, fund performance tended to fall in line with that of older funds.

"Since most of the outperformance occurs within the first six months, the strategy wouldn't be practical unless you know when these funds will be launched and can get in quickly," Riepe said.

With so many good, seasoned funds available, professional advisors have mixed views about new funds.

John Eckel, president of Pinnacle Investment Management in Simsbury, Conn., likes new funds in theory because they start out with a small asset base. "This allows the manager to concentrate the portfolio and be more flexible," he said. It's an especially important consideration for funds that focus on small stocks, he believes.

But Eckel doesn't emphasize new funds for his clients and, in fact, buys only those that have a proven manager behind them.

For example, he likes a couple of funds unveiled at year-end by Denver-based Marsico Funds, which are headed by Tom Marsico, a former star manager at Janus.

Nancy Coutu, president of Money Managers Advisory in Oak Brook, Ill., says she is wary, seeing scores of new funds being created with relatively inexperienced stock pickers at the helm.

"New funds are wonderful as long as the managers are not new," said Coutu, who looks for managers who have delivered consistently good returns for at least five years.

She cited some of the Artisan funds, run by Carlene Murphy Ziegler, who made a name for herself at the Strong and SteinRoe families.

However logical this proven-manager strategy may sound, it's no guarantee of success, of course. Just ask fans of Garrett Van Wagoner, who had been a top-ranked small-stock manager with the Govett group when he left to start his own fund company in 1995.

Unfortunately, Van Wagoner unveiled three funds at the end of 1995, shortly before small stocks in general--and the technology issues he favors in particular--took a dive. Compounding the new fund company's woes was the fact that his thinly manned operation may have attracted more money from new shareholders than it could handle in such a short period.

"It was an absolutely ideal scenario" that, in retrospect, didn't quite turn out that way, Coutu said.

Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work." He can be reached at

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