When a fund posts great returns its first year, we
wistfully look back and wish we’d bought in. Who
wouldn’t want to have owned
Fairholme
FAIRX
in
2000
,
DoubleLine Total Return Bond
DBLTX
in
2010
, or
Vanguard Primecap
VPMCX
in
1985
?
New funds benefit from small asset bases and a
lack of legacy positions. Some have even said they
can trade ahead of a firm’s big funds, but I think
that’s pretty rare in the current compliance-stringent
environment. A
FundInvestor
subscriber recently
wrote to make a similar case and request that I study
the idea. I don’t often take requests, but I figured
this was worthwhile even though I suspected the
data wouldn’t be encouraging. To test the idea that
new funds are more successful than older funds,
we gathered data on funds launched in
2004
,
2006
,
and
2008
. We grouped them by asset class and
looked at how they fared overall. Then we looked
forward over the next three and five years to see
what returns, Morningstar Ratings, and success rates
they generated. The success rate tells us what
percentage of funds in a group survived and outper-
formed over the ensuing period.
Not So Much
So, how’d they do? Not all that well. The class of
2004
produced a five-year success rate of
39%
compared with
41%
for the fund universe at large.
The funds that did survive had modest
2
.
8
and
2
.
9
average star ratings over the ensuing three- and
five-year periods. So, this tells me new funds overall
don’t have a big advantage, though they also don’t
suffer a big disadvantage. Results are just modestly
worse than for the fund world as a whole. Balanced
funds produced a respectable
51%
success rate, but
the other groups were lousy.
For the class of
2006
, the results were a bit worse.
The five-year success rate for that class was
36%
—a
fair amount below the
41%
for the fund universe.
The star ratings for three and five years were
2
.
7
and
2
.
8
on average. This time, foreign-equity funds had
a decent
47%
success rate and taxable-bond funds
produced a
53%
success rate.
However, if you look at the results from the three
years of new funds you’ll see there’s no particular
pattern to asset-class figures that would lead you to
say that one is actually a good bet when it comes
to new funds. For example, taxable-bond funds had
a
39%
success rate in the
2004
class but a
22%
success rate in the
2008
class.
The class of
2008
had the worst success rate of all
at
35%
, most likely because it’s tough to launch a
fund at the start of a bear market. In this case, just
333
of the
481
funds launched in
2008
were around
at the end of
2013
. Thus, a huge number of mistakes
were swept under the rug. The average star ratings
of survivors were a bit higher at
2
.
9
for both the
three-and five-year periods. I think that’s mainly due
to how many funds were killed off. Naturally, a
fund that starts life with a huge loss faces long odds
of ever turning a profit for the fund company, so
many more underperformers were killed off from
the class of
2008
than others.
New Funds Aren’t
So Special
Fund Reports
4
Artisan International Investor
Sound Shore Investor
Weitz Partners Value Investor
Vanguard Windsor II Investor
Morningstar Research
8
Active Versus Passive Is the
Wrong Question
The Contrarian
10
A Closed-Fund Watchlist
Red Flags
11
Did You Notice These New
Sector Bets?
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Customize Your Income-
Replacement Rate in Retirement
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
A High-Yield Wobble
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel,
Director of ManagerResearch
and Editor
FundInvestor
September 2014
Vol. 23 No. 1
Research and recommendatio s for the s riou fund investo
SM
Continued on Page 2
