Eyeing a new fund? Check out manager

Separating the dynamos from the duds is tough, but here are a few tips.


Published: Sunday, January 4, 2004 at 6:01 a.m.
Last Modified: Saturday, January 3, 2004 at 9:45 p.m.

Now that the holidays are at an end, it's time to think about new things. The new year, for example. The new electric lawn flamingo your Aunt Edna sent you. And, of course, all the new mutual funds.

Late December is the time for mutual fund companies to launch new funds. That's not because they have spent the last 11 months researching the best investment opportunities for 2004. It's all about the marketing. A new fund launched now will have a full-year record for 2004. If it's a winner, the fund will be included in the lists of top-ranking funds for 2004.

But the odds of a new fund having hot performance for a full year is low, particularly if it's a sector fund. A fund company usually launches a sector fund to take advantage of an investing trend.

However, even astute trend-trackers will take a few months to discover the trend. Then the fund has to wend its way through registration for public offering through the Securities and Exchange Commission. By the time the new fund is available to the public, the trend is in its waning phases - and ready to head south.

A flurry of new specialty funds in one sector is one of the loudest warning bells you'll ever hear on Wall Street. In 2000, for example, the industry launched 73 new technology funds, many of which specialized in Internet stocks. Many posted utterly appalling losses. Amerindo B2B fund, for example, a play on business-to-business Internet stocks, plunged 68 percent in the 12 months ended June 2001. The fund was quietly merged out of existence in February.

If you're tempted by a new fund, your first question should be: ``Why?'' You have thousands of mutual funds to choose from, many with experienced managers and decent long-term records. Why invest in a fund with no track record?

One reason: New funds tend to be small. True, there are plenty of small, rotten funds. But many great funds have their most explosive performance when they're small. As they get larger, they get harder to manage and often lag.

Fidelity Magellan achieved near-legendary status under manager Peter Lynch, who drove the fund to a 2,500 percent gain, versus 500 percent for the Standard & Poor's 500 stock index. When he took the fund's helm in 1977, it had $22 million in assets. He retired in 1990, when the fund had $13 billion. It has $65 billion now, and has lagged the S&P 500 the past 10 years.

The question: How can you tell an Amerindo B2B from a Fidelity Magellan fund? To some extent, you can't. Peter Lynch wasn't a legend in the investing world until after he'd sent Magellan soaring. It may be that Kailash Birmiwal, manager of the Birmiwal Oasis Fund, the top-performing new fund this year, will beat Peter Lynch's record. Or not. We just don't know.

But we can tilt the odds in our favor a bit by looking for new funds with experienced management. And a few intriguing offerings have appeared this year.

  • Federated Kaufmann Small Cap (800-341-7400). For years, the Kaufmann fund was one of the best small-company stock funds around, thanks to managers Lawrence Auriana and Hans Utsch. The fund grew to more than $5.5 billion, however, and began to lag.

    Federated trotted out the new Kaufmann Small Cap fund in December 2002, however, and it has been trouncing its larger sibling. Best of all, the fund has just $240 million in assets. The drawback: It's an expensive fund. Its A shares charge 2.4 percent a year in expenses. One can only hope Federated will lower the fund's fees as it gets larger.

  • Bjurman Barry Small-Cap Growth. O. Thomas Barry has been managing small-cap stocks since 1978. The Bjurman Barry Micro-Cap Growth fund, now closed, has gained 65 percent this year. The Small-Cap Growth fund is up 44.2 percent. Your best route for information is www.bjurmanbarry.com.

  • Pimco Diversified Income - (800) 927-4648. Manager Mohamed El-Erian runs Pimco's Emerging Markets Bond fund, which has gained 33 percent this year. Although Pimco's bond guru Bill Gross gets most of the attention, El-Erian is an exceptional manager.

    If you want to take a flier, the top new funds are in the chart. But unless you know something about the fund's manager, your time might be better spent figuring out where to put that electric lawn flamingo.

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