Are New Mutual Funds Better? 3 Attractive New Funds - Best of Funds

By Zacks Equity Research,

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According to a study released by the National Bureau of Economic Research, new mutual funds are likely to outperform the older funds. The study believes the 'Fund Age' has a role to play in the returns or the fund performance. This is driven by factors that new fund managers take less risk, they are more skilled, and the Industry growth creates a stiff competitive pressure for older funds. The newer funds outperform the older counterparts based on 'gross benchmark-adjusted returns'.

In the study titled SCALE AND SKILL IN ACTIVE MANAGEMENT, authors Lubos Pastor, Robert F. Stambaugh and Lucian A. Taylor have considered 3,126 funds from 1979 through 2011 using data from the Center for Research in Security Prices and Morningstar. The period was chosen for the dramatic growth in the mutual fund industry over these years.

Skill & Performance

It is most likely that skilled fund managers will try and get the best returns out of a fund. Herein is a major argument of the study - "new funds entering the industry tend to be more skilled than the existing funds".

Younger managers are said to be less likely to take risk. Poor performance may make them lose their jobs, and this fear leads them to manage a fund more safely and conventionally. Also, the new graduates are said to bring in fresh policies and newer style of fund management.
However, here we find a contradiction and the argument is based on the experience of the fund managers who have been on the job for a longer tenure.

The study's measure of the fund skill is however constant during the fund's life term. The study says: "Learning-on-the-job effect hinges on a coefficient estimate that is not clearly significant".

Industry Growth

However, there are chances of the average fund performance failing to trend higher despite improved skill. This might be a result of industry growth hindering the fund performance. The study shows that returns decline at industry level. "This negative relation between industry size and fund performance is stronger for funds with higher turnover, higher volatility, as well as small-cap funds", notes the study.
As the industry grows, there is a lot more competitive pressure. That is what affects the fund performance. The report states that a mid-cap growth fund will not only face competitive threats from another mid-cap fund but from certain large-cap growth funds and small-cap growth funds as well.
On this note, the study finds that negative relation between a fund's tenure and performance is absent after adjusting the industry size.

New Vs Old: Performance

The study considers funds equal to or below 3 years to be young. Funds aged more than 10 years are considered to be old. The study noted that these new funds outperform oldest by 7.2 basis points, or 0.9%, annually. The newest funds are also boosted by incubation bias.

According to the study: "Incubation is a strategy that some families follow to initiate new funds. A family might start multiple funds privately, with a limited amount of capital. At the end of an evaluation period, it might open only some of these funds, often those with better performance, to the public. Evans finds that the incubated funds outperform the non-incubated funds during the incubation period".
Funds from three to six years are said to be immune to this bias. They outperform the oldest funds by over 0.5% annually.

New Funds That Look Attractive

If the study is realistic, investors might be interested in the following 3 funds. All these funds are less than three years old. They have provided significant return over the last 1 year and since inception. Moreover, they sport a Zacks Mutual Fund Rank #1 (Strong Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Fairholme Allocation (FAAFX) seeks total return over the long term. It invests in a portfolio of investments in fixed income, equity or cash and cash equivalent asset classes. The fund may allocate any amount to these asset classes. Investments may be parked in any, all or none of these asset classes.

The fund's inception date is Dec 31, 2010 and has returned 27.90% over the last one year. Since inception, the fund has returned 40.18%.

The minimum initial investment is $25,000. The expense ratio is 1.00% as compared to category average of 1.24%. Bruce R. Berkowitz is the fund manager and has managed this fund since 2010.

Dunham Focused Large Cap Growth A (DAFGX) invests in large-cap growth companies that are traded on the U.S. equity exchanges or are traded over-the-counter. The fund usually restricts its number of holdings to 35 stocks.

The fund's inception date is Dec 8, 2011 and has returned 20.80% over the last one year. Since inception, the fund has returned 35.53%.

The minimum initial investment is $5,000. The expense ratio is 1.94% as compared to category average of 1.21%. Scott L. O'Gorman, Jr. is the fund manager and has managed this fund since 2011.

Munder Integrity Mid-Cap Value A (MAIMX) seeks capital growth by investing most of its assets in equities of mid-cap companies. Market capitalizations of these companies are similar to the ones listed the Russell Midcap Index.

The fund's inception date is Jul 1, 2011 and has returned 27.52% over the last one year. Since inception, the fund has returned 53.97%.

The minimum initial investment is $2,500. The expense ratio is 1.50% as compared to category average of 1.24%. Adam G. Friedman is the fund manager and has managed this fund since 2011.

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Mutual Funds
Referenced Stocks: FAAFX , DAFGX , MAIMX

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