New Mutual Funds Often Begin Low Key

In contrast to the dramatic entrances sometimes enjoyed by new issues in the stock market, most new mutual funds make their debuts quietly.

Even the most ambitious stock funds arrive on the scene lacking a key attribute for star status--a performance record.

And since funds’ values are determined by the worth of their portfolios, rather than open bidding by buyers and sellers, they can’t soar in their first hours of availability the way a hot new stock can.

All in all, the standard advice from the experts is to approach new funds with great care, even if the manager is famed as a stock-picking genius.

The annals of the industry are filled with tales of star managers who flopped when they started new funds specifically designed to showcase their talents.

Furthermore, marketers of new funds are most likely to focus on what’s hot. So the risk is high of buying into some investment specialty or strategy at the very moment that it’s topping out.

In a study of the performance of hundreds of new funds over the past two decades, investment adviser Sheldon Jacobs found that slightly more than half posted first-year results that were below the average of their class.

“The odds of winning with a new fund are not too good,” he concludes in his Handbook for No-Load Fund Investors.

“While some new funds are immediate winners, can you reasonably expect to select those heroes beforehand? Without performance records to analyze, it’s a most difficult task.”

But with all those caveats, spotting and tracking new stock funds can still be an intriguing venture for active fund investors.

For the sake of illustration, consider the example of the Newcomer Fund, an aggressive stock fund just added to the Hypothetical Group.

Hypothetical is a long-established family that has been poking along lately with only average performance, and honchos in its management company badly want a winner to get their name on the various lists of the best-performing funds.

The older funds in the family aren’t promising candidates to achieve this mission, if only because of their size.

But the Newcomer Fund is small, highly maneuverable and unencumbered with old losers in its portfolio. So if the analysts in the Hypothetical research department can come up with, say, one or two really good ideas a month, why not focus their efforts on getting Newcomer off to a good start?

In addition, Hypothetical’s extensive trading on behalf of its whole family entitles it to a moderate-sized allotment of stock from each hot new issue.

If the shares of these new issues are parceled to all of Hypothetical’s stock funds, the impact on the bigger funds’ performance will be so small that nobody will ever notice it. But if the whole allotment is steered each time into Newcomer’s account, it can help launch the baby fund.

While you won’t find many people in the fund business admitting to doing this themselves, few dispute that it happens in places. It’s the sort of thing that regulators are seeking to cover better.

In the meantime, trying to cash in on any new fund’s presumably favored status is still a high-risk undertaking. If a few new issues that are force-fed to the Newcomer Fund should happen to do badly, the results could be quite painful.