New but not always improved
NEW YORK — As investors continue their stampede into mutual funds, the fund companies themselves have started a stampede to bring new funds to market.
And while these baby funds often outperform their more established siblings, most experts say investors need to stay diligent before bringing one home. The reason: Some new funds are merely clones or slight variations of existing funds. Moreover, in some cases managers are inexperienced or come from funds with dismal track records.
Still, most analysts welcome the newcomers. Investors now have more choices than ever when picking a fund, says fund maven Tim Schlindwein, of Schlindwein Associates, Chicago.
According to the Investment Company Institute, in Washington, the main trade arm for the mutual-fund industry, there are now more than 7,000 mutual funds in the US, up from a little over 3,000 funds in 1990. Each calendar year has seen an increase in the number.
Moreover, the number of funds is actually much higher than 7,000, since there are another 2,000 or so share classes of existing funds, each having distinct trading characteristics.
Industry officials and reporting services such as Morningstar and Value Line say measuring the number of new funds is problematic, since many are not yet listed in trade papers or newspapers. Some are regional funds unknown outside their city of origin.
And in some cases what are called new funds turn out to be old funds, refashioned to appear new. Still, at least 200 new funds were created this past year, and perhaps as many as 250 to 300.
In looking for a new fund, you have to do your homework, Schlindwein says. Know exactly what the new fund is about and how its investment style differs from other funds offered by the same fund family or competitors.
Take the case of two popular funds with similar names: UAM Clipper Focus Fund, and Clipper Fund. The Clipper Fund, sandwiched between the "B" and "D" funds in newspaper fund listings, has been around since 1984. It is a large-cap growth fund - meaning it invests in many large companies with the potential to increase profits each year - that, last year, gained just over 19 percent.
Meantime, the UAM Clipper Focus Fund was started up in September 1998. It is also a large-cap growth fund, and it also invests in only about 25 companies. And it returned about 18 percent last year. But the criteria for selecting stocks in which to invest are different. And because Clipper Focus is so new, it's often not listed in newspapers.
And while the two funds have the same management team, they have different administrative (ownership) groups. Clipper (800-776-5033) requires a minimum investment of $5,000 on regular accounts. UAM Clipper Focus (877-826-5465) only requires $2,500. (Both require $2,000 on IRAs.)
UAM Clipper Focus is fully invested. All dollars that are put into the fund go into equities. Clipper, by comparison, often carries a large cash position, which makes it less risky. In a down market, UAM Clipper Focus could be far more volatile than the bigger Clipper Fund.
But with the US economy growing as it has for seven years, a fully invested fund such as UAM Clipper Focus has the potential for larger gains, assuming it has the right mix of good stocks.
Do new funds tend to outperform older funds? Not necessarily, experts say, although the evidence seems clear that well-managed new funds can frequently outperform their peers.
New funds have the luxury of buying only companies that the fund management genuinely likes, Schlindwein notes.
Managers are not forced to put investment dollars to work in questionable stocks just to keep the dollars in play, as is often the case in older funds with large cash inflows.
There is also a competitive factor: The manager of a new fund wants to prove his mettle as quickly as possible.
New funds that rolled out this past year included index, real-estate, technology, international, and specialty funds, such as those that invest in health-care companies.
More index and technology funds are expected during 1999, as fund companies seek to tap the euphoria of market momentum.
In looking for a new fund, say experts, start with the past performance of the portfolio manager (Value Line and Morningstar give quick resumes of fund managers).
If the new fund is part of a fund family, find out the group's overall track record. If a fund family is successful, that may be a positive indicator for the new fund.
Most important, says Schlindwein, buy into a fund for the right reason: Does it match your investment plan? If so, and it offers something slightly new, then it may be a welcome addition to your portfolio.