2
In sum, odds are against new funds. It can seem like
the opposite is true because we don’t take notice of
most of the lousy new funds that start poorly and get
killed off quietly. Thus, our selective memory makes
them seem better than they are.
Why Are They a Poor Bet?
New funds tend to be lousy bets because fund com-
panies make them that way. Some will try the
shotgun approach in which they blast out a bunch
of funds, figuring that they’ll come out ahead
of the game even if only
20%
hit it big and gather
enough assets to be profitable. Fund companies
that take this approach are interested in quantity,
not quality. Today, you see this behavior most
in the exchange-traded fund and alternative funds
world, where there is a land rush going on, but
it still happens in open-end funds.
Another reason is that fund companies tend to slap
high expense ratios on new funds. The thinking is that
shareholders in that fund should bear the costs of
the fund’s small asset base. But of course that makes
the odds of success even longer. I don’t really like the
New Funds Aren’t So Special
Continued From Cover
New Funds Are Not Enough
Asset Class
# of New
Distinct Funds
# of Funds With
Subsequent
5
-Yr Return
Average
Subsequent
5
-Yr Rank
Subsequent
5
-Yr
Batting Average
Subsequent
5
-Yr
Success Rate
Subsequent
5
-Yr Rating
2004
U.S. Equity
136
93
49
51.61
35.29
2.95
Sector Equity
23
18
53
33.33
26.09
3.00
International Equity
23
16
49
56.25
39.13
2.80
Balanced
75
67
42
56.72
50.67
2.90
Alternative
15
15
54
33.33
33.33
2.71
Taxable Bond
66
49
46
53.06
39.39
2.92
All Funds
6,461
4,665
46
56.61
40.88
2.91
2006
U.S. Equity
186
97
46
56.70
29.57
3.03
Sector Equity
32
26
48
50.00
40.63
2.88
International Equity
77
57
43
63.16
46.75
3.07
Balanced
117
83
47
54.22
38.46
2.55
Alternative
33
27
64
29.63
24.24
1.89
Taxable Bond
53
45
37
62.22
52.83
3.31
All Funds
6,774
4,978
46
56.89
41.81
2.89
2008
U.S. Equity
111
67
48
52.24
31.53
3.03
Sector Equity
21
16
36
75.00
57.14
3.31
International Equity
130
95
46
55.79
40.77
3.04
Balanced
137
91
52
47.25
31.39
2.59
Alternative
33
27
56
40.74
33.33
2.65
Taxable Bond
41
31
61
29.03
21.95
2.52
All Funds
6,974
5,277
48
53.80
40.71
2.84
Data through 2013. These tests show how funds launched in 2004, 2006, and 2008 fared. The All Funds line at the bottom of each group shows the total fund world for
means of comparison. As you can see, new funds didn’t show an advantage over seasoned funds. I’ve left the muni group out of the table because there were not enough
funds launched in these years for meaningful results.
