New Funds: Jumping In Has Risks
BOSTON — Investors looking to reap big gains in today's pumped-up market are often attracted to newly opened mutual funds with blockbuster returns - or the potential for them.
Last week, for example, the new PBHG Limited Fund, a small-company fund, reached its $150 million-asset cutoff in its first day open. Investors were likely anticipating good performance by PBHG star manager Christine Baxter.
Or consider the Van Wagoner Emerging Growth Fund. It is all of six months old and on July 2 already had a hefty $815 million in assets and a 51 percent return.
Though having managers with track records like Ms. Baxter and Garrett Van Wagoner may bode well for a new fund, financial advisers say investors should still pause before jumping in.
"With thousands of mutual funds available, there's no reason to take something completely untested," says Susan Kaplan, president of Kaplan Financial Services, a financial-planning firm in Wellesley, Mass.
Experts encourage investors to consider problems that new funds often face:
*Higher expense ratios, because of start-up costs, can reduce returns.
*Initial public offerings, which may be rewarding but also risky, can be heavily weighted in new funds.
*The manager may not have been through a market correction.
*A manager may perform differently without the research and expertise left behind at another fund family.
*Managers may have duties beside managing investments, particularly in new fund families.
At least 274 new funds have opened in 1996, reports Lipper Analytical Services. And that's nothing compared with recent years.
The number of open-end funds has more than doubled since 1992, rising from 4,439 to 9,400, including new share classes of existing funds. In 1995 alone, 1,360 funds debuted.
Historically, new-fund performance has been uneven. Some studies have shown that new funds perform slightly below existing funds on average.
But shortcomings aside, new funds do have some advantages, experts note.
"In some instances, it pays to take a chance on a new fund," notes Sheldon Jacobs, editor and publisher of The No-Load Fund Investor newsletter.
Small asset size, for example, allows them to be more nimble than big funds. And new funds often hit on an untapped niche, Mr. Jacobs says. Funds brought out in an area that a fund company knows well may also be at an advantage.
Still, some advisers recommend waiting one to five years before investing in a new fund. Ms. Kaplan tells her clients to wait at least five. By looking at funds that old or older, she says, an investor can see how a fund and manager weathered market trouble in 1987, '90, '94.
She argues that plenty of existing small-company growth funds - which often attract the most attention - are just as "racy" as newer offerings, but have the advantage of proven managers.
For example, Kaplan cites the PBHG Growth Fund, up 72 percent in the 12 months ending May 31, or the Kaufmann Fund, up 54 percent for the same period. Both were started a decade ago.
To assess a new fund, you should focus on the manager, some experts say, since you have little else to go on.
Questions to ask include: How did the manager fare at his or her previous fund, if there was one? Did it have big returns? If so, how were they achieved? What is the manager's investment style? How have funds in the new fund's niche or objective performed in the past?
Many new funds are set up by managers defecting from established fund groups to start their own companies. The environment for these start-ups, which often have a particular investment niche, is good right now as it is easy to farm out "back-office" duties, like customer service, and funds can be distributed through discount brokers.
At Artisan Partners, formed in 1995, co-founder Carlene Murphy Ziegler is able to concentrate almost entirely on managing money in one of the company's two funds, while other duties are handled by outside firms and her co-founder husband, Andrew.
Mr. Van Wagoner also farms out administrative duties. He spends the bulk of his time managing and researching his three - soon to be six - new funds. Of managing all the funds at once, he says, "I've had no problem so far."